IC-NRLF 


SB    37    17M 


LIBRARY 

OF  THK 

UNIVERSITY  OF  CALIFORNIA. 


IAXJL 

Class 


GIFT  OF 


Hlb 


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^H^^HHHH 


The  Law 


AND 


Distribution  of  Surplus 


OF 


Life  Insurance  Companies 


BY 

WILLIAM    A'.    FRICKE 


NEW    YORK 
I9O2 

Published  by 

URA 

87  Nassau  St. 
K:  $1.00 


Entered  according  to  Act  of  Congress 
^>j^     in  the  Year  1902, 

By  WILLIAM  A.  FRICKE, 

in  the  office  of  the  Librarian  of  Congress, 

Washington,  D.  C. 


PREFACE. 


The  study  and  investigation  of  the  questions  in- 
volved in  this  Treatise  commenced  while  Commis- 
sioner of  Insurance  of  Wisconsin,  and  but  for  the 
time  and  labor  required  in  its  preparation,  would 
have  been  presented  in  an  official  capacity. 

Active  participation  in  the  conduct  of  the  busi- 
ness of  life  insurance  has  enabled  a  continuation  of 
the  study  and  investigation  from  a  practical  stand- 
point, and  has  still  further  emphasized  the  neces- 
sity of  a  check  on  the  needless  accumulation  of 
millions  and  unjustifiable  forfeiture  impositions. 

The  results  are  presented  not  in  a  spirit  of  op- 
position to  any  particular  company,  but  in  the  hope 
that  their  consideration  may  prove  of  benefit  to  the 
policyholders,  and  of  lasting  good  to  the  business 
of  life  insurance. 

W.  A.  F. 

NEW  YORK,  Sept.  i,  1902. 


1 12685 


CONTENTS 

PAGE 

I.  INTRODUCTION  7 

II.  THE  LAW  AND  ITS  APPLICATION  9 

III.  PAST  AND  PRESENT  PRACTICES  34 

IV.  LARGE  ACCUMULATIONS  NOT  NECESSARY  60 
V.  TAXATION  67 

VI.  LEGISLATION  72 


L— INTRODUCTION. 

The  necessity  for  some  law  regulating  the  dis- 
tribution of  surplus  becomes  apparent  when  a  few 
simple  life  insurance  facts  are  considered : 

First — That  surplus  is  the  excess  of  a  company's 
funds  over  all  liabilities,  and  represents  the  excess 
payments  of  policyholders,  and  profits,  and  is  the 
amount  available  for  dividends. 

Second — That  life  insurance  can  be  conducted 
only  on  the  Mutual  Plan,  by  the  combining  of  a 
large  number  of  individuals  who  insure  themselves. 
This  aggregation  of  individuals  is  called  "THE 
COMPANY,"  and  the  persons  selected  as  the  col- 
lecting and  distributing  agents  are  "THE  OFFI- 
CERS." The  company  and  the  officers  act  only  as 
the  medium  for  the  transaction  of  the  business.  It 
is  a  perversion  of  the  fundamental  principles  of 
life  insurance  that  the  aggregation  of  individuals 
who  compose  and  own  the  company  simply  act  as 
the  medium  for  the  transactions  of  the  officers. 

Third — That  all  that  is  vicious  in  the  conduct 
of  the  business  of  life  insurance — competition,  re- 
bating, excessive  commissions  and  extravagance — 
is  chargeable  to  the  deferred  dividend  contract ;  all 
that  is  good — equity,  economy  and  actual  cost — is 
due  to  the  annual  dividend  or  short  period  account- 
ing to  policyholders. 

Fourth — That  the  surplus  accumulations  of  life 
insurance  companies — beyond  all  needs  and  re- 


quirements — have  reached  the  enormous  sum  of 
more  than  THREE  HUNDRED  MILLIONS  OF  DOLLARS  ; 
and 

Fifth — That  the  privilege  of  forfeiture  of  sur- 
plus accumulation,  as  exercised  by  companies,  is 
without  consideration  to  the  policyholders,  against 
public  policy,  and  is  apt  to  nullify  the  very  pur- 
poses for  which  the  insurance  was  taken. 


II.— THE   LAW   AND   ITS   APPLICATION. 


We  look  therefore  in  the  law  for  some  pro- 
vision which  may  be  invoked  to  compel  equity,  by 
an  accounting  and  return  of  these  enormous  accu- 
mulations to  the  policyholders  from  whose  contri- 
butions they  have  been  derived,  and  in  the  law  of 
Wisconsin  we  find : 

Section  14  of  Chapter  59,  Laws  of  1870,  of  Wis- 
consin, approved  March  4,  1870,  as  amended  by 
Chapter  309,  Laws  of  1887,  enumerated  as  Sec- 
tion 1952  S.,  1898,  and  151  Ins.  Laws,  of  Wis. : 

"Every  life  insurance  corporation  do- 
ing business  in  this  State  upon  the  prin- 
ciple of  mutual  insurance,  or  the  members 
of  which  are  entitled  to  share  in  the  sur- 
plus funds  thereof,  MAY  make  distribu- 
tion of  such  surplus  as  they  may  have 
accumulated  annually,  or  once  in  two, 
three,  four  or  five  years,  as  the  directors 
thereof  may  from  time  to  time  determine. 
In  determining  the  amount  of  surplus  to 
be  distributed  there  shall  be  reserved  an 
amount  not  less  than  the  aggregate  net 
value  of  all  outstanding  policies,  said 
value  to  be  computed  by  the  American 
experience  table  of  mortality  with  inter- 
est not  exceeding  four  and  one-half  per 
cent." 


The  application  of  this  law  depends  upon  the 
legal  construction  of  the  word  "MAY." 

Does  the  word  "MAY"  in  line  number  five  mean 
"MUST"  or  "SHALL"  ?  Is  the  provision  mandatory 
or  permissive?  Does  it  impose  a  duty,  or  simply 
confer  a  privilege,  or  discretionary  power? 

"The  words  of  a  statute  are  to  be  construed  with 
reference  to  the  subject  matter  of  the  enactment 
and  the  object  sought  to  be  obtained.  Then 
meaning  is  not  to  be  found  so  much  in  the  strict 
etymological  propriety  of  language,  nor  even  in  its 
popular  use,  as  in  the  subject  or  occasion  on  which 
they  are  used.  In  conformity  with  the  rule  that 
the  meaning  of  words  is  to  be  adapted  to  the  par- 
ticular subject  matter  in  reference  to  which  they 
are  used,  general  words  are  to  be  restricted  or  ex- 
panded to  suit  the  subject  matter  to  which  they  are 
applied." 

23  A.  &  E. — E.  of  Law,  322,  323. 

"The  word  'may'  in  a  statute  has  always  been 
construed  'must'  or  'shall'  whenever  it  can  be  seen 
that  the  legislative  intent  was  to  impose  a  duty  and 
not  simply  a  privilege  or  discretionary  power,  and 
where  the  public  is  interested  and  the  public  or 
third  persons  have  a  claim  de  jure  to  have  the 
power  exercised.  But  it  is  only  where  it  is  neces- 
sary to  give  effect  to  the  clear  policy  or  intention 
of  the  legislature  that  it  can  be  construed  in  a  man- 
datory sense,  and  where  there  is  nothing  in  the 
connection  of  the  language  or  in  the  sense  or  policy 
of  the  provision  to  require  an  unusual  interpreta- 
tion, its  use  is  merely  permissive  or  discretionary." 
14  A.  &  E. — E.  of  Law,  979. 

10 


"The  word  'may'  means  'must'  or  'shall'  only 
in  cases  where  the  public  rights  or  interests  are 
concerned,  or  where  the  public  or  third  persons 
have  a  claim  de  jure  that  the  power  should  be  ex- 
ercised." 

"For  a  complete  application  of  this  rule  it  only 
remains  to  be  determined  in  what  cases  the  rights 
or  interests  of  the  public  or  third  persons  are  con- 
cerned, and  where  they  have  a  claim  de  jure  to  the 
exercise  of  the  power ;  and  here,  fortunately,  there 
is  no  disagreement  among  the  authorities.  The 
cases  fully  establish  the  doctrine  that  when  public 
corporations  or  officers  are  authorized  to  perform 
an  act  for  others,  which  benefits  them,  that  then  the 
corporation  or  officers  are  bound  to  perform  the 
act.  The  power  is  given  to  them  not  for  their  own, 
but  for  the  benefit  of  those  in  whose  behalf  they 
are  called  upon  to  act ;  and  such  is  presumed  to  be 
the  legislative  intent.  In  such  cases  they  have  a 
claim  de  jure  to  the  exercise  of  the  power.  But 
where  the  act  to  be  done  is  not  clearly  beneficial  to 
the  public  or  third  persons,  the  exercise  of  the 
power  is  held  to  be  discretionary." 

9  Wisconsin  309. 

The  rule  thus  laid  down  is  adopted  from  New 
York,  and  the  authoritv  of  the  courts  of  this  State 
cited  to  sustain  the  position. 

"Effect  must  be  given  -to  the  obvious  intention 
of  the  legislature,  when  to  do  so  will  prevent  the 
act  from  failing,  and  when  no  violence  will  be 
done  to  the  language  employed." 

People,  etc.,  vs.  Lohnas,  54  Hun.  604. 

8  N.  Y.  S.  104. 

II 


"To  determine  whether  'may'  in  a  statute  is 
equivalent  to  'shall,'  not  only  the  context,  but  the 
circumstances  surrounding  the  passage  of  the  act, 
and  the  object  in  view,  must  be  considered;  and 
where  such  language  is  held  to  be  mandatory  there 
must  be  a  defined  public  interest  or  a  vested,  well- 
defined  private  right  to  be  subserved,  given  or  pro- 
tected." 

People,  etc.,  vs.  Mayor,  59  Hun.  258. 

38  St.  Kept.  296. 
12  N.Y.  8.890. 

"The  rule  reiterated — that  in  the  interpretation 
of  statutes  the  great  principle  which  is  to  control 
is  the  intention  of  the  legislature  in  passing  the 
same,  which  intention  is  to  be  ascertained  from  the 
cause  or  necessity  of  making  the  statute  as  well  as 
other  circumstances.  A  strict  and  literal  interpre- 
tation is  not  always  to  be  adhered  to,  and  where 
the  cause  is  brought  within  the  intention  of  the 
makers  of  the  statute,  it  is  within  the  statute,  al- 
though by  a  technical  interpretation  it  is  not  within 
the  letter.  It  is  the  spirit  and  purpose  of  a  statute 
which  are  to  be  regarded  in  its  interpretation ;  and 
if  these  find  fair  expression  in  the  statute,  it  should 
be  so  construed  as  to  carry  out  the  legislative  in- 
tent, even  though  such  construction  is  contrary  to 
the  literal  meaning  of  some  provisions  of  the 
statute.  A  reasonable  construction  should  be 
adopted  in  all  cases  where  there  is  a  doubt  or  un- 
certainty in  regard  to  the  intention  of  the  law- 
makers." 

People  vs.  Lacombe,  99  N.  Y.  43. 

"Where  the  intent  of  a  statute  is  manifest  effect 
should  be  given  to  that  rather  than  to  the  letter." 
Harntze  vs   Howe,  28  Wis.  293. 

12 


"  'May'  should  be  construed  in  a  statute  to  mean 
'shall'  whenever  the  rights  of  third  persons  or  the 
public  good  requires." 

Steines  vs.  Franklin  County,  48  Mo.  167. 
State  vs.  Saline  County  Court,  48  Mo.  390. 
James  vs.  Dexter,  112  111.  489. 

"In  construing  statutes  the  word  'may'  will  be 
construed  as  mandatory  only,  for  the  purpose  of 
sustaining  or  enforcing,  but  not  creating  a  right." 

State  vs.  Holt  County,  39  Mo.  521. 
"The  words  'may'  and  'shall'  should  be  consid- 
ered, in  the  construction  of  the  law,  as  convertible 
terms." 

Cook  vs.  Spears,  2  Cal.  412. 
See  list  of  cases  in : 

14  A.  &  E.— E.  of  Law,  979. 

The  conclusion  would  seem  to  be  that  Section 
1952  is  mandatory;  that  the  word  "may"  means 
"must"  or  "shall,"  and  that  no  other  discretionary 
power  is  vested  in  the  officers  of  a  company  than 
to  extend  the  period  of  distribution  to  two,  three, 
four  or  five  year  periods,  instead  of  "annually." 

That  such  interpretation  of  the  word  "MAY"  in 
the  insurance  statutes  of  Wisconsin  is  accepted  is 
evidenced  by  the  action  of  the  Northwestern  Mu- 
tual Life  Insurance  Company  at  the  last  session  of 
the  legislature.  Section  1951  of  the  statutes  pro- 
vides how  a  life  insurance  corporation  "MAY"  in- 
vest its  funds,  and  such  investments,  prior  to 
the  session  of  1901,  were  restricted  to  United 
States,  State,  county,  city,  town  or  village  bonds ; 
first  mortgage  liens  on  real  estate  worth  at  least 
twice  the  money  loaned  thereon,  or  in  the  first 
mortgage  railway  bonds  of  any  railway  company 

13 


duly  incorporated  and  organized  under  the  author- 
ity of  this  State;  promissory  notes  secured  by 
pledge  of  such  bonds  as  collateral  as  the  company 
may  invest  in,  and  policy  loans.  The  "Northwest- 
ern" desired  to  extend  the  field  of  its  investments 
to  "mortgage  bonds  of  street  railway  companies," 
and  applied  to  the  legislature  for  an  amendment 
of  Section  1951,  and  in  Chapter  22,  Laws  of  1901, 
this  law  appears  amended  by  the  insertion :  "or  in 
the  mortgage  bonds  of  any  railway  or  street  rail- 
way company  duly  incorporated  and  organized 
under  the  authority  of  this  State."  If  the  word 
"may"  was  simply  permissive,  and  it  was  left  to 
the  discretion  of  the  officers  how  to  invest  the 
funds  of  the  company,  then  it  was  unnecessary  to 
go  to  the  legislature  for  the  authority  granted  by 
this  amendment,  but  because  the  act  of  investing 
the  funds  is  a  case  where  the  rights  and  interests  of 
every  policyholder  are  concerned,  the  word  "may" 
means  "must"  or  "shall"  and  the  investment  of 
the  funds  in  the  class  of  securities  defined  in  Sec- 
tion 1951  becomes  mandatory,  and  could  be  ex- 
tended only  by  an  act  of  the  legislature. 

A  study  of  the  methods  and  practices  of  the 
companies  will  show  that  such  was  the  intention 
of  the  legislature,  and  that  compliance  with  this 
law  is  in  harmony  with  the  practices  of  the  funda- 
mental idea  of  mutuality,  by  which  life  insurance 
alone  becomes  possible,  and  that  by  the  method  of 
short  period  accounting  to  the  policyholder  the  ac- 
cumulations on  a  policy  will  always  be  greater. 

To  emphasize  the  intention  of  the  legislature  in 
enacting  what  is  now  known  as  Section  1952  S. 
'98.  it  will  only  be  necessary  to  state  that  the  gen- 

14 


eral  practice  at  that  time  among  companies  was 
either  annual  dividends  or  a  distribution  within  a 
five-year  period. 

Policies  which  provided  for  the  distribution  of 
surplus  at  ten,  fifteen  and  twenty  year  periods  were 
then  unknown.  The  competition  for  business,  and 
the  consequent  increase  in  the  commission  rate  paid 
to  agents,  and  increased  expenses,  made  necessary 
some  plan  to  enable  the  companies  to  get  away 
from  this  annual  or  short  period  accounting  to 
policyholders. 

First  came  the  Tontine  plan,  under  which  the 
non-payment  of  premium  lapsed  the  policy,  and  the 
reserve  and  accumulated  surplus  became  forfeited. 
While  the  plan  proved  an  incentive,  by  catering  to 
the  cupidity  of  many  to  take  insurance,  the  hard- 
ships it  imposed  created  much  opposition,  result- 
ing in  some  States  in  the  enactment  of  non-forfei- 
ture laws  and  legislative  investigations,  with  the  re- 
sult that  this  plan  was  changed  to  the  Semi-Ton- 
tine or  Deferred  Dividend  plan.  Under  this  plan, 
in  the  event  of  lapse,  the  reserve  on  the  policy  is 
used  as  a  single  premium  to  purchase  either  paid- 
up  or  extended  insurance,  and  the  surplus  to 
which  the  policy  is  entitled,  forfeited.  In  theory, 
the  benefit  of  this  plan  is  that  the  large  lapse  ratio 
which  occurs,  and  the  attendant  forfeiture  of  accu- 
mulations, will  swell  the  amount  of  profit  to  the 
persistent  policyholder.  In  practice,  the  result  is 
an  increased  expense  and  larger  commissions, 
which  in  every  case  has  left  the  actual  profit  to  the 
persistent  policyholder  smaller  than  the  estimate 
which  tempted  him  to  accept  this  plan. 

15 


A  company  is  not  much  different  than  an  indi- 
vidual. If  you  or  I  were  compelled,  annually,  to 
give  some  one  in  authority  over  us  a  statement  of 
the  money  we  received  and  itemized  expenditures, 
and  our  success  and  future  prosperity  was  depend- 
ent upon  making  an  economical  showing,  without 
doubt  our  balance  of  savings  would  be  much 
greater  than  if  we  could  defer  the  day  of  reckoning 
for  twenty  years.  Deferred  for  twenty  years,  we 
would  hope  to  make  up  the  extravagances  of  each 
year  by  the  economies  of  those  to  follow,  until  in 
the  end,  just  as  does  the  company,  we  should  find 
that  the  result  did  not  realize  our  estimate.  Now, 
if  we  will  follow  this  illustration,  elementary 
though  it  may  be,  a  little  further,  the  question, 
''Will  the  accumulations  on  a  policy  be  greater 
under  a  short  period  accounting?"  will  be  an- 
swered in  the  affirmative  and  prove  the  merit  of 
Section  1952  S.  98. 

Life  insurance  can  properly  be  conducted  only 
in  one  way — the  coming  together,  or  combining, 
of  a  large  number  of  individuals  to  insure  them- 
selves. This  aggregation  we  call  a  company,  and 
the  collecting  and  distributing  agents  selected  are 
the  officers.  This  is  not  changed  by  reason  of  some 
companies  having  a  capital  stock.  Capital  stock 
for  a  life  insurance  company  came  about  in  this 
way:  Over  forty  years  ago  there  were  so  many 
companies  formed,  and  so  many  failed,  that  the 
legislatures  of  a  number  of  States  amended  the 
law  so  that  no  life  insurance  company  could  be 
organized  unless  with  a  capital  or  assets  of  at 
least  one  hundred  thousand  dollars,  and  of  course 
the  organizers  put  up  their  money  as  capital  and 

16 


controlled  the  company,  rather  than  to  pay  it  in  as 
assets ;  but  this  does  not  change  the  fact  that  those 
who  join  a  company  simply  combine  to  insure 
themselves,  and  that,  with  very  few  exceptions,  the 
general  practice  is  that  companies  are  conducted 
on  the  mutual  plan,  i.  e.,  the  policyholders  par- 
ticipate in  the  accumulations  to  reduce  the  cost  of 
their  insurance  by  having  their  overpayments  re- 
turned, together  with  their  proportionate  share  of 
the  profits. 

If  we  were  to-day  to  organize  a  life  insurance 
company  for  the  insurance  of  our  lives,  the  com- 
pany would  form  only  the  medium  for  the  trans- 
action of  the  business  of  protecting  one  another. 
If  we  could  at  the  beginning  of  each  year  deter- 
mine just  what  would  be  the  actual  expense,  actual 
mortality,  actual  interest  earnings  and  the  profits 
from  forfeitures,  we  should  all  insist  that  our 
premiums  should  be  based  upon  such  actual  cost, 
plus  the  reserve;  and,  were  we  able  to  so  deter- 
mine the  actual  cost,  the  dividend  feature  would  be 
eliminated,  as  there  could  then  be  no  overpayments 
or  profits.  Being  unable,  however,  to  determine 
beforehand  such  actual  cost,  we  base  the  premium 
upon  a  standard  table  of  mortality,  and  assume  for 
our  reserve  requirement  a  rate  of  interest  so  low 
that  it  will  be  sure  to  be  realized,  and  to  this  net 
premium  we  add  our  loading  for  expenses.  We 
now  have  a  gross  premium  entirely  on  the  side  of 
safety;  but,  since  our  interests  are  mutual,  we 
agree  that  at  the  end  of  the  year,  after  the  actual 
cost  has  been  met  and  all  contingent  liabilities  pro- 
vided for,  there  shall  be  returned  to  each  member 
his  overpayments,  plus  the  proportionate  share  of 

17 


what  profit  has  been  realized,  and  interest  earnings 
over  and  above  that  required  to  maintain  the  re- 
serve. 

"Since  the  return  of  surplus  simply  adjusts  the 
assumed  cost  and  the  actual  cost  of  the  insurance, 
and  is,  in  effect,  merely  a  return  of  overpayments, 
it  should  be  made  as  often  as  the  actual  cost  is  as- 
certained, whenever  the  overpayment  is  deter- 
mined. There  is  no  reason  why  the  surplus  should 
not  be  returned  each  year,  or  such  portion  of  it  as 
prudence  will  allow;  no  reason  why  such  portion 
as  may  be  safely  divided  should  be  retained  for  any 
period  of  years.  Especially  is  this  true  of  any  com- 
pany with  a  considerable  business  and  an  experi- 
ence sufficient  to  establish  the  safety  of  its  as- 
sumptions as  to  mortality  and  interest,  and  which 
doesn't  expect  to  spend  for  expenses  more  than  its 
future  premiums  will  provide." 

The  policyholder  in  a  mutual  company,  or  a  com- 
pany conducted  on  the  mutual  plan,  is  a  partner, 
and  has  a  right  to  an  accounting,  a  right  to  demand 
tie  distribution  of  his  excess  payments  and  profits 
within  such  a  limited  period  as  will  incur  forfeiture 
to  the  least  number,  and  that  was  the  practice  of 
companies,  and  that  was  the  purpose  of  Section 
1952. 

The  repeated  decisions  of  the  Supreme  Court 
of  Wisconsin  clearly  show  that  companies  of  other 
States  are  permitted  to  transact  business  in  Wis- 
consin "not  inconsistent  with  the  laws  or  policy 
of  the  State,"  and  only  under  such  conditions  and 
restrictions  as  the  law  may  impose  "they  may  be 
permitted  or  prohibited,  and  if  permitted,  the  sov- 

18 


ereign  power  may  impose  such  conditions  and  re- 
strictions as  it  sees  fit." 

A  company  violating  or  failing  to  comply  with 
any  law  applicable  thereto  is  subject  to  the  penalty 
of  having  its  license  and  authority  to  transact  busi- 
ness in  the  State  canceled  and  revoked. 

It  is  a  question  whether  a  company  can  enter 
into  an  agreement  with  a  policyholder  that  the 
surplus  accumulation  to  which  he  has  become  en- 
titled under  the  provisions  of  Section  1952  shall 
remain  with  the  company.  Section  1951,  which 
has  been  the  law  for  many  years,  says :  "No  life 
insurance  corporation  organized  under  the  laws 
of  this  State  shall  *  *  *  do  any  banking  busi- 
ness." And  while  from  the  language  used  in  Sec- 
tion 1951 — "organized  under  the  laws  of  this 
State" — the  doing  of  a  banking  business  is  pro- 
hibited only  to  Wisconsin  life  insurance  corpora- 
tions, is  it  not  true  that  when  a  life  insurance 
company  of  another  State  is  licensed  and  admitted 
to  transact  business  in  Wisconsin,  it  becomes  to  all 
intents  and  purposes  a  Wisconsin  corporation,  and 
subject  to  all  laws  applicable  to  domestic  corpora- 
tions? To  hold  otherwise  would  be  to  hold  that 
the  legislature,  in  the  enactment  of  Section  1951, 
intended  to  confer  greater  rights  and  privileges 
upon  the  life  insurance  corporations  of  other 
States  by  restricting  the  privileges  of  domestic 
corporations.  Whatever  may  be  the  string  tied  to 
the  surplus  accumulation  of  a  policyholder  as  to 
forfeiture,  when  once  that  surplus  accumulation 
has  been  determined  in  accordance  with  the  pro- 
visions of  Section  1952,  and  it  remains  as  a  sur- 
plus accumulation  to  be  credited  to  the  account  of 


a  policyholder,  it  is  as  much  a  DEPOSIT  with  the 
company  as  it  would  be  a  DEPOSIT  with  a  bank 
if  placed  there  to  the  credit  of  his  account.  The 
company  receiving  such  a  deposit  of  surplus  ac- 
cumulation holds  out  as  an  inducement  to  making 
such  a  deposit  the  accretions  of  compound  interest, 
and  invests  and  loans  such  deposits  to  accomplish 
that  purpose. 

As  a  matter  of  fact  there  can  be  no  other  profit 
to  such  a  depositor  except  compound  interest,  since 
the  Annual  Dividend  policyholder  shares  equally 
in  all  other  profits.  Such  deposits  are  not  part  of 
the  life  insurance  business  of  the  corporation,  and 
are  beyond  all  its  needs  and  requirements,  and 
constitute  the  features  of  a  "banking  business" 
detrimental  to  the  best  interests  of  the  policyhold- 
er, and  therefore  prohibited  by  law.  The  fact  that 
the  company  injects  into  this  one-sided  banking 
business  agreement,  a  provision  that  if  the  de- 
positor fails  to  continue  making  deposits  for  a  cer- 
tain number  of  years  all  his  surplus  accumulation 
deposits  shall  be  forfeited  to  the  company,  does 
not  make  it  less  a  banking  business,  since  all  these 
one-sided  forfeiture  provisions  are  without  con- 
sideration, and  make  the  policy  a  wager  contract, 
and  are  clearly  against  public  policy. 

But  even  if  Section  1952  does  not  prohibit  a 
policyholder  agreeing  to  permit  his  surplus  accu- 
mulations to  remain  with  the  company,  it  does  re- 
quire that  the  distribution  of  such  surplus  shall  be 
annual,  unless  the  directors  have  made  use  of  the 
option  and  extended  such  distribution  period  to 
two,  three,  four  or  five  years.  This  carries  with  it 
an  individual  account  with  the  policyholder,  peri- 

20 


odical  accounting  showing  the  credit  of  such  sur- 
plus, and  carrying  such  accumulations  as  a  lia- 
bility. 

When  such  individual  accounts  are  not  kept, 
periodical  accounting  not  made,  and  such  credit 
accumulations  not  carried  as  a  liability,  then  the 
word  "DISTRIBUTE"  in  Section  1952  means  "PAY 
OVER,"  and  the  policyholder  of  any  company  which 
does  not  comply  with  this  section,  who  has  a  policy 
providing  for  a  ten,  fifteen  or  twenty  years  distri- 
bution, can  at  any  time  demand  an  accounting  and 
the  payment  to  him  of  his  accumulation. 

The  reason  the  word  "DISTRIBUTE"  does  not 
mean  "PAY  OVER"  in  all  cases  is  that  when  this 
law  was  enacted  a  number  of  companies  were  do- 
ing business  upon  what  was  called  "The  half-note 
plan;"  policyholders  would  settle  their  premiums 
by  paying  half  cash  and  giving  a  note  for  the  bal- 
ance ;  these  notes  were  charged  against  the  policy- 
holder  with  a  certain  interest  rate ;  the  distribution 
of  the  surplus  was  made  annually,  or  within  the 
rive-year  period,  and  the  policyholder's  share 
credited  against  his  note  debit,  so  that  there  was 
an  individual  account  and  accounting,  a  distribu- 
tion and  not  a  paying  over.  On  the  other  hand, 
the  policyholders  who  had  paid  their  premiums  in 
cash  had  their  share  paid  over  to  them.  This  half- 
note  plan  proved  unsatisfactory,  as  one-half  of  the 
premium  in  note,  with  the  attendant  interest,  was 
a  greater  load  than  the  dividends  could  take  care 
of,  and  therefore  created  dissatisfaction  among  the 
policyholders,  who  were  led  to  believe  that  their 
profits  or  dividends  would  take  care  of  the  notes 
and  interest,  and  the  plan  was  done  away  with. 

21 


Then,  too,  a  number  of  companies,  in  their  con- 
tract agreements,  provided  that  the  dividend  ap- 
portioned should  be  added  to  the  policy. 

Section  1952  does  not  permit  discrimination  be- 
tween policyholders ;  if  the  option  of  two,  three, 
four  or  five  years  has  not  been  made  use  of,  the 
distribution  must  be  made  annually  on  all  policies. 
Neither  can  the  distribution  be  annual  on  some 
and  at  other  periods  on  others.  The  period  of  dis- 
tribution within  this  five-year  period  must  be  alike 
on  all  policies. 

When  a  policy  has  lapsed  in  a  company  failing 
to  comply  with  Section  1952,  upon  which  surplus 
accumulation  has  been  forfeited,  such  lapsed 
policyholder  has  a  cause  of  action  for  an  account- 
ing and  payment  of  such  forfeited  surplus,  within 
the  statute  of  limitation. 

In  a  company  which  has  not  and  does  not  com- 
ply with  Section  1952,  a  policyholder  has  paid  his 
premiums  for  three  years,  and  then  fails  to  con- 
tinue payment.  Under  the  terms  of  his  contract 
the  company  forfeits  his  surplus  accumulations  but 
uses  the  reserve  of  his  policy  as  a  single  premium, 
and  continues  his  policy  in  force  as  extended  in- 
surance for  3  years  131  days,  when  the  insur- 
ance terminates.  Had  the  company  also  added  the 
accumulated  surplus  to  the  single  premium,  the 
extended  insurance  would,  for  example,  have  con- 
tinued for  a  year  longer.  Six  months  after  the 
3  years  131  days  this  policyholder  dies.  The 
company  having  violated  the  law  and  forfeited  the 
surplus,  will  not  an  action  lie  against  the  company 
for  the  face  of  the  policy — of  course  within  the 
statute  of  limitation  ? 

22 


When  we  consider  that  all  the  companies  trans- 
acting business  in  Wisconsin,  with  four  or  five 
exceptions,  are  violating  this  law;  that  eight  out 
of  ten  of  all  the  policies  issued  are  deferred  divi- 
dend contracts,  and  that  these  policy-holders  do  not 
know  of  their  right  to  demand  an  accounting ;  that 
thousands  of  such  policies  have  been  lapsed  and 
the  surplus  to  which  they  were  entitled  forfeited, 
then  only  do  we  realize  how  widespread  will  be 
the  effect  of  a  decision  on  this  section  by  the 
courts,  though  there  are  grave  doubts,  whether  any 
company  will  ever  permit  such  an  action  to  be 
tried.  Still,  a  decision  on  this  law,  as  no  doubt  it 
would  be  rendered,  would  do  more  real  good  to 
the  policyholder  and  to  life  insurance  as  a  whole, 
than  anything  else  that  could  happen. 

Another  important  question  arises  under  Section 
1952  S.  '98: 

Several  companies  issue  Semi-Tontine,  or  De- 
ferred Dividend  policies,  yet  comply  with  the 
provisions  of  Section  1952  in  so  far  as  a  distribu- 
tion— as  the  company  sees  fit  to  make — is  made 
annually  and  credit  the  dividends  to  the  account 
of  the  policyholder,  and  such  apportioned  surplus 
is  carried  on  the  books  and  in  the  annual  state- 
ments to  insurance  departments  as  a  liability. 
Under  these  deferred  dividend  policies  the  accu- 
mulation is  not  paid  over  until  at  the  expiration  of 
the  deferred  dividend  period — generally  at  the  end 
of  fifteen  or  twenty  years — and  such  accumulation 
is  declared  forfeited  to  the  company  in  the  event 
of  failure  to  continue  the  payment  of  premiums  or 
the  death  of  the  policyholder.  The  policyholder 
receives  no  consideration  of  any  kind  for  the  privi- 

23 


lege  of  forfeiture  which  the  company  arrogates  to 
itself,  and  by  means  of  which  the  policy  holder  may 
be  deprived  of  the  very  purpose  for  which  he  has 
taken  a  policy  of  insurance — the  protection  of  his 
family. 

To  illustrate:  A  man  aged  31  takes  a  $10,000 
twenty-payment  life  policy,  with  a  twenty-year  de- 
ferred dividend  period,  for  which  he  pays  an  an- 
nual premium  of  $310.30.  He  continues  the  pay- 
ment of  his  premiums  for  six  years,  and  during 
that  time  there  has  been  a  surplus  accumulation  of 
$439.88  on  his  policy.  The  seventh  annual  pre- 
mium falls  due,  which,  owing  to  temporary  finan- 
cial embarrassment,  the  man  is  unable  to  meet. 
The  company  declares  the  policy  lapsed,  and 
under  the  non-forfeiture  laws,  or  the  policy  con- 
ditions, uses  the  reserve  held  on  the  policy  as  a 
single  premium  for  a  small  paid-up  policy,  payable 
at  death,  and  forfeits  the  $439.88  of  accumulation 
which  would  have  kept  the  policy  in  force  for  its 
face. 

Compare  this  Deferred  Dividend  contract  and  its 
results  in  this  case — and  there  are  thousands  like 
it — with  a  short  period  accounting  or  Annual  Divi- 
dend policy: 

At  the  same  time,  another  man,  also  aged  31, 
takes  a  $10,000  twenty-payment  policy  on  the  an- 
nual dividend  plan,  with  an  annual  premium  of 
$310.30.  Instead  of  taking  his  dividends  in  cash 
or  using  them  to  reduce  his  premium,  he  allows 
them  to  remain  to  purchase  additions  to  his  policy. 
These  are  called  reversionary  additions,  the  com- 
pany using  the  cash  dividends  as  a  single  premium, 
and  such  an  amount  of  paid-up  insurance  as  the 

24 


dividend  will  buy  is  added  to  the  policy,  the  policy- 
holder  having  the  privilege  at  any  time  to  recon- 
vert these  additions  into  cash ;  in  the  event  of  death 
the  additions  are  paid  with  the  face  of  the  policy. 
During  six  years,  dividends  amounting  to  $439.88 
have  been  so  applied,  adding  $1,000  of  paid  up 
insurance  to  the  policy;  then  the  seventh  annual 
premium  falls  due,  which,  owing  to  temporary 
financial  embarrassment,  this  man  also  is  unable 
to  meet ;  he  goes  to  the  company  and  requests  that 
his  reversionary  additions  be  reconverted  into  cash, 
and  receiving  $439.88  in  cash  for  such  reversionary 
additions  he  pays  his  premium,  has  a  balance  left 
and  his  policy  is  in  force  for  the  full  amount. 

Now  apply  this  reasoning  to  the  policy  in  the 
event  of  the  death  of  both  of  these  men  after  the 
payment  of  the  sixth  premium.  Both  have  the 
same  premium,  the  same  dividend  accumulation, 
yet  the  company  forfeits  the  whole  accumulation 
of  the  one  under  the  deferred  dividend  contract, 
while  under  the  annual  dividend  contract  it  pays 
to  the  beneficiary  $1,000  more  than  the  face  of  the 
policy  by  reason  of  the  reversionary  additions. 

Carry  this  illustration  a  little  further  to  see  the 
results  on  these  two  policies  if  both  policyholders 
live  to  pay  the  twenty  premiums  and  should  both 
happen  to  die  nineteen  years  and  eleven  months 
after  the  issuance  of  these  policies : 

The  annual  dividend  policyholder,  having  left 
his  dividends  to  be  applied  as  reversionary  addi- 
tions, which  at  this  time  amount  to  the  sum  of 
$3>!57-8o  (figures  given  are  actual  results),  the 
company  pays  the  beneficiary  under  the  policy 
$13,157.80  in  settlement  of  the  claim. 

25 


The  deferred  dividend  policyholder  dying  just 
thirty  days  prior  to  the  dividend  period  fixed  in  his 
policy,  the  company  pays  the  beneficiary  the  face  of 
the  policy,  $10,000,  and  forfeits  the  accumulated 
cash  dividends,  thus  depriving  the  beneficiary  of 
the  $3,157.80  in  additions,  which  the  dividends,  if 
so  applied,  would  have  added  to  the  policy. 

Yet  both  policyholders  paid  the  same  premium 
for  the  same  amount  of  insurance  and  under  Sec- 
tion 1952  would  have  been  entitled  to  the  same 
dividend.  The  annual  dividend  policyholder  had 
every  right  and  privilege  under  his  contract  that 
was  granted  the  deferred  dividend  policyholder, 
with  the  additional  advantage  of  retaining  absolute 
control  of  his  surplus  accumulation,  while  the  de- 
ferred dividend  policyholder  received  no  considera- 
tion of  any  kind  for  the  forfeiture  privilege,  which 
the  company  arrogated  to  itself,  should  h*  fail  to 
continue  payment  of  premiums  either  by  lapse  or 
death,  during  the  full  period  of  twenty  years,  and 
to  which  surplus  accumulation,  the  company 
claims,  the  deferred  dividend  policyholder  has  no 
right  or  interest  until  at  the  end  of  the  dividend 
period  of  twenty  years  and  must  then  accept  as 
such  accumulation,  without  question,  the  sum 
which  the  company  apportions  to  him — conditions 
which  it  was  the  purpose  of  Section  1952  to  pre- 
vent— a  contract  which  is  in  violation  of  this  law. 

Everything  that  is  vicious  in  life  insurance 
comes  from  deferred  dividend  contracts;  every- 
thing that  is  good  comes  from  the  short  period 
accounting  or  annual  dividend  contract,  and  it  was 
to  preserve  perfect  equity  and  prevent  iniauity, 
that  prompted  the  enactment  of  Section  1952. 

26 


If  a  company  may  agree  with  a  policy  holder  to 
defer  the  actual  payment  of  his  accumulation  for  a 
period  beyond  five  years,  surely  it  cannot  under 
this  law  arrogate  to  itself  the  right  to  forfeit  these 
accumulations,  a  right  for  which  it  has  given  the 
policyholder  no  consideration,  and  making  of  the 
misfortunes — death  or  financial  embarrassment — a 
wager  in  which  the  policyholders'  accumulations 
are  the  stake,  a  "heads  I  win,  tails  you  lose"  game, 
contrary  to  public  policy  and  contrary  to  ever^  in- 
tent and  purpose  of  Section  1952. 

That  such  was  not  the  purpose  of  the  Legislature 
is  again  shown  in  the  enactment  of  Section  1955  o 
S. '98: 

"No  life  insurance  company  doing  business  in 
this  State  shall  make  or  permit  any  distinction  or 
discrimination  in  favor  of  individuals,  between  in- 
surants of  the  same  class  and  equal  expectation  of 
life,  in  the  amount  or  payment  of  premium  or  rates 
charged  for  life  or  endowment  policies,  or  in  the 
dividends  or  other  benefits  payable  thereon,  etc.'*' 

The  premium  or  rate  for  "insurants  of  the  same 
class,"  i.  e.,  same  age  and  same  form  of  policy, 
whether  deferred  dividend,  or  annual  dividend, 
are  the  same  in  all  companies  issuing  both  kinds 
of  dividend  contracts;  the  dividend  earning  must 
consequently  be  the  same,  yet  there  is  a  distinction 
and  discrimination  in  the  dividends  and  benefits 
payable.  The  manner  of  the  payment  of  the  sur- 
plus or  dividend,  whether  annual  or  deferred,  does 
not  distinguish  the  "form  of  policy,"  the  distin- 
guishing feature  being,  whether  it  is  a  contract 
upon  which  premiums  are  payable  during  the 
whole  life  of  the  insured,  or  the  premiums  are 

27 


limited  in  number,  as  for  10,  15  or  20  years; 
whether  the  insurance  carries  only  for  a  term  of 
years  and  then  ceases ;  or  whether  it  is  an  endow- 
ment contract  under  which  the  policy  also  becomes 
payable  if  the  insured  lives  to  the  end  of  the  lim- 
ited period  fixed  in  the  contract. 

Under  any  mutual  form  of  contract  the  policy- 
holder  is  entitled  to  his  share  of  the  profits  or 
surplus.  The  surplus  to  the  annual  dividend 
policyholder  is  absolute;  with  the  deferred  divi- 
dend policyholder  the  surplus  constitutes  a  wager 
— in  which  the  company  risks  nothing  and  holds 
the  stakes — and  this  makes  the  whole  difference 
between  an  annual  and  a  deferred  dividend  con- 
tract. 

Does  it  not  seem  reasonable,  that  under  Section 
1952,  emphasized  by  Section  1955  o  and  prohibited 
by  Section  1951,  there  can  be  no  forfeiture  of  the 
surplus  accumulations  once  apportioned  and  cred- 
ited to  the  policyholder,  and  no  one-sided  agree- 
ment will  permit  such  forfeiture. 

If  this  is  true,  then  there  are  thousands  of 
former  policyholders  who  have  been  wronged  by 
these  forfeitures. 

The  rivalry  and  competition  for  a  large  volume 
of  business,  with  the  attendant  excessive  commis- 
sions and  bonuses,  which  have  fostered  rebating, 
•'twisting"  and  lapsing,  have  increased  the  cost  of 
life  insurance  to  the  policyholder  by  decreasing  divi- 
dends ;  to  all  of  which  enormous  surplus  accumu- 
lations, far  beyond  the  needs  of  "unforeseen  con- 
tingencies," have  lent  a  helping  hand.  Large  ac- 
cumulations of  surplus  can  add  no  especial  strength 
to  a  mutual  company  in  which  deferred  dividends 

28 


are  carried  as  a  liability,  nor  can  it  offer  any  special 
inducement  to  the  new  policyholder.  Except  for 
the  purpose  of  guarding-  against  depreciation  or 
fluctuation  of  securities,  for  which  a  reasonable 
accumulation  is  sufficient,  a  large  surplus  is  rather 
an  unnecessary  temptation,  and  not  in  the  interest 
of  the  policyholder. 

True  mutuality  and  perfect  equity  demand  that 
as  soon  as  each  policy's  share  of  the  surplus  can 
be  determined,  such  excess  and  profit  shall  be  re- 
turned to  the  policyholder.  or  be  credited  to  the 
policy  as  a  liability  to  the  holder  or  his  beneficiary. 

The  profits  accruing  to  a  policyholder  will  al- 
ways be  greater  if  the  distribution  is  made  in  com- 
pliance with  Section  1952,  not  only  because  such  a 
short  period  accounting  will  have  been  a  check  to 
extravagance  and  promote  economy  in  order  to 
prove  to  the  policyholder  the  benefit  of  continuing 
payments,  but  also,  because  the  distribution  will 
have  been  an  equitable  one,  instead  of  an  arbitrary 
amount  "in  the  manner  and  amount  as  determined 
by  the  actuaries  of  the  company"  and  to  which,  in 
some  companies — in  violation  of  Section  1952 — the 
assured  is  said  to  agree  to  accept  the  distribution 
made  at  the  expiration  of  the  dividend  period,  for 
himself,  his  heirs  and  assigns,  irrespective  of  what 
that  determination  may  be. 

Then  again  the  distribution  under  Section  1952 
permits  no  other  deduction  from  the  total  assets 
of  the  company  to  determine  what  constitutes  sur- 
plus, except  the  reserve;  while  this  may  not  be 
good  practice,  it  gives  a  larger  surplus  to  distribute 
and  requires  the  distribution  of  the  whole  surplus 
so  determined. 


If  a  company  has  not  complied  with  the  provis- 
ions of  Section  1952,  and  is  issuing  policies  in 
which  a  distribution  of  profits  is  provided  beyond 
a  period  of  five  years,  then  ihe  company  has  vio- 
lated the  law,  has  subjected  itself  to  the  revocation 
of  its  license,  and  any  policyholder  holding  such  a 
contract  can  demand  an  accounting  under  this  sec- 
tion and  the  payment  of  accumulated  profits;  and 
on  such  policy  the  distribution  of  such  profits  must 
thereafter  be  annual. 

Again,  where  a  company  has  failed  to  comply 
with  this  law,  there  cannot  be  a  legal  lapse  or  for- 
feiture of  a  deferred  dividend  policy,  if  it  can  be 
shown  that  the  policyholder  had  an  equity  in  any 
surplus  accumulation  of  the  company  and  that  such 
equity  or  credit,  had  this  law  been  complied  with, 
could  have  been  used  to  keep  the  policy  in  force. 

Section  1978  S.  '98  expressly  provides  that  no 
corporation  "shall  do  any  business  of  insurance 
of  any  kind  *  *  *  in  this  State,  or  with  any 
resident  of  this  State,  except  according  to  the  con- 
ditions and  restrictions  of  these  Statutes,"  and 

Section  1955  makes  it  "the  imperative  duty"  of 
the  commissioner  of  insurance  "to  revoke  any  and 
every  authority  *  *  *  to  transact  business  in 
this  State" — "If  any  such  corporation  shall  violate 
or  fail  to  comply  with  any  provision  of  the  law  ap- 
plicable thereto." 

The  insured  makes  no  specific  agreement  as  to 
the  forfeiture  of  his  overpayments  and  profits,  nor 
does  the  application  or  contract  specifically  provide 
for  such  forfeiture  other  than  the  fixing  efi  a  period 
deferred  for  fifteen  or  twenty  years  wheij  the  dis- 
tribution of  such  accumulation  shall  be  made  to 

30 


him ;  on  the  contrary,  the  fact  of  such  forfeiture  is 
systematically  withheld  from  the  knowledge  of  the 
insured,  who  is  dazzled  by  the  alluring  estimates 
of  great  profits  to  be  his  at  the  end  of  the  distribu- 
tion period. 

"Forfeitures  are  only  enforced  when  it  is  the 
plain  intent  of  the  contract  that  they  shall  be ;  pro- 
visions relied  upon  to  authorize  a  forfeiture  are 
construed  most  strongly  against  insurer,  and  if 
they  are  repugnant,  courts  will  enforce  those  in 
favor  of  insured."  Hull  vs.  Northwestern  Mutual 
L.  Ins.  Co.  39  Wis.  397. 

The  conclusions  on  this  statutory  provision  may 
be  summarized  as  follows : 

That  the  surplus  of  every  life  insurance  corpora- 
tion doing  business  on  the  mutual  plan,  the  policy- 
holders  being  entitled  to  share  in  the  profits,  must 
be  distributed  in  accordance  with  the  provisions  of 
Section  1952. 

That  unless  the  directors  of  a  company  have 
made  use  of  the  option  given  in  Section  1952  to 
extend  the  time  of  distribution  to  two,  three,  four 
or  five  year  periods,  the  distribution  of  the  surplus 
on  all  policies  must  be  annual. 

That  the  distribution  must  be  made  at  a  like 
period,  within  the  time  limit  laid  down  in  Section 
1952,  on  all  policies  entitled  to  participate ;  that  to 
make  the  distribution  annually  on  some  policies, 
and  at  the  end  of  five-year  periods  on  others,  is  not 
compliance  with  the  law. 

That  when  the  distribution  of  surplus  is  made  in 
accordance  with  Section  1952  a  company  may 
agree  with  the  insured  to  apply  such  apportioned 
dividends  as  reversionary  additions  or  as  additions 

31 


to  hasten  the  maturity  of  the  policy  as  an  endow  - 
ment. 

That  there  can  be  no  holding  of  surplus  beyond 
the  period  accepted  by  the  company  in  accordance 
with  the  provisions  of  Section  1952,  and  that  once 
declared,  must  be  turned  over  to  the  policyholder. 

That  there  can  be  no  forfeiture  of  surplus  ac- 
cumulations. If  not  distributed,  the  company  has 
violated  the  provisions  of  Section  1952  and  cannot 
benefit  by  its  own  wrong;  when  once  the  surplus 
has  been  declared  under  the  law  it  becomes  a  vested 
right  and  cannot  be  forfeited  for  failure  to  comply 
with  conditions  beyond  the  control  of  the  policy- 
holder. 

That  all  agreements  made  contrary  to  the  pro- 
visions of  the  statutes  are  illegal  and  void.    That 
any  agreements  as  to  forfeiture  of  surplus  accumuM 
lated  beyond  the  period  provided  in  Section  1952!) 
are  in  violation  of  the  law  and  contrary  to  public' 
policy. 

That  on  all  policies  on  which  the  distribution  of 
the  surplus  has  not  been  made,  or  on  which  pay- 
ment of  the  same  is  deferred  beyond  the  period 
fixed  in  Section  1952,  the  policyholder  can  demand 
an  accounting  and  payment  of  his  equitable  share 
of  the  surplus. 

That  where  there  has  been  forfeiture  of  surplus 
by  reason  of  lapse  or  death,  the  policyholder  or 
beneficiary  has  a  cause  of  action  for  the  recovery 
of  such  surplus,  within  the  statute  of  limitation. 

That  wherever  there  has  been  a  death  of  a  lapsed 
policyholder,  whose  forfeited  surplus  would  have 
kept  the  policy  in  force  beyond  the  date  of  death, 
the  beneficiary  has  a  cause  of  action  for  the  face 

32 


of  the  policy,  within  the  statute  of  limitation. 

That  fully  80  per  cent,  of  all  policies  of  life  in- 
surance issued,  with  the  requirements  imposed  by 
companies  covering  surplus  accumulations,  are  in 
violation  of  the  Statutes  of  this  State. 

That  compliance  with  Section  1952  would  favor- 
ably effect  the  holder,  and  beneficiary,  of  every  one 
of  the  77,910  policies  now  in  force  in  Wisconsin 
in  deferred  dividend  companies. 

That  on  80  per  cent,  of  the  30.470  policies  lapsed 
in  Wisconsin  during  the  past  six  years,  to  which 
this  law  is  applicable,  there  was  more  or  less  for- 
feiture of  surplus  accumulation  to  which  the  pol- 
icyholder  is  rightfully  entitled. 

Just  immediately  prior  to  1870,  when  this  law 
made  its  appearance  on  the  statute  books  of  Wis- 
consin, the  Equitable  Life  Assurance  Society  of 
New  York,  for  the  first  time  presented  a  policy  pro- 
viding for  a  deferred  dividend  period  beyond  five 
years,  and  the  almost  simultaneous  action  of  the 
Legislature  in  the  enactment  of  Section  14,  Chap- 
ter 59,  Laws  of  1870  (now  Section  1952),  naturally 
leads  to  the  conclusion  that  the  purpose  and  inten- 
tion was  to  prevent  the  very  practices  which  then 
were  beginning  to  be  agitated,  for,  next  to  the 
beneficiary,  the  State  is  most  largely  interested  that 
life  insurance  shall  not  be  endangered  by  the  as- 
sumption of  practices  which  may  nullify  the  very 
purpose  for  which  the  insurance  was  taken,  and 
which  are  clearly  against  public  policy. 


33 


III.— PAST  AND  PRESENT  PRACTICES. 


The  practices  of  the  companies  as  to  the  dis- 
tribution of  surplus,  prior  to  1870  and  before  the 
enactment  of  the  law,  known  as  Section  1952  S. 
98  Wis.,  will  be  found  in  the  sworn  annual  state- 
ments of  the  companies,  as  submitted  to  the  Insur- 
ance Department  of  New  York. 

The  annual  statement  then  contained  the  follow- 
ing ''Interrogatory :" 

"8.  HOW  OFTEN  DOES  THE  COMPANY  DECLARE 
DIVIDENDS  OR  BONUSES  OR  SURPLUS,  AND  WHEN, 
AND  IN  WHAT  MANNER,  ARE  THE  SAME  PAID?  AND 
ARE  SUCH  DIVIDENDS  MADE  UPON  THE  BASIS  OF  AN 
EQUAL  PERCENTAGE  UPON  PREMIUMS  OR  OTHER- 
WISE, AND  UPON  WHAT  PRINCIPLE?" 

To  which  the  companies,  all  doing  business  in 
Wisconsin  at  that  time,  replied  as  follows : 

EQUITABLE  LIFE  : 

"Answer — Annually,  on  the  contribution 
system;  dividends  applied  to  the  increase  of 
policies  or  in  the  payment  of  premiums." 

GERMANIA  LIFE: 

"Answer — Annually,  in  cash,  or  at  the 
choice  of  the  assured,  in  such  other  manner  as 
the  Board  of  Directors  may  determine;  divi- 
dends are  made  upon  the  basis  of  an  equal  per- 
centage upon  premiums." 

34 


HOME  LIFE  : 

"Answer — Dividends  are  declared  annually, 
and  paid  at  the  next  settlement  of  premium,  by 
indorsing  the  amount  on  premium  loans  or  ap- 
plying it  to  the  payment  of  premium ;  hereto- 
fore the  dividends  have  been  by  equal  per- 
centage." 

MANHATTAN  LIFE: 

"Answer — Annually  settled  when  annual 
premium  is  paid ;  rates  vary  according  to  class 
of  policies." 

MUTUAL  LIFE  : 

"Answer — Dividends  are  declared  annually, 
upon  the  contribution  plan  by  the  Actuary, 
and  may  be  used  by  the  policyholder  either  to 
augment  the  insurance,  or  toward  the  pay- 
ment of  premiums,  and,  with  a  paid-up  policy, 
are  payable  in  cash." 

NEW  YORK  LIFE  : 

"Answer — Dividends  are  declared  annually, 
upon  the  'contribution  plan/  and  may  be  used 
to  augment  the  insurance,  or  toward  payment 
of  premiums." 

UNITED  STATES  LIFE  : 

"Answer — Every  three  years,  and  payable 
with  the  sum  insured,  and  are  made  on  a 
basis  of  percentage  on  the  premiums  with 
dividends  on  dividends." 

WASHINGTON  LIFE  : 

"Answer — Annually,  from  January  I,  1869, 
upon  the  'contribution  plan.' '' 

35 


METROPOLITAN  (then  National  Travelers)  : 

''Answer — Annually,  payable  in  three  years. 
Percentage  basis." 

AETNA  LIFE  : 

"Answer — On  ordinary  life  participating 
policies,  annually,  commencing  with  the  third 
payment  of  premiums.  All  other  participating 
policies  annually,  commencing  with  the  fifth 
payment,  applied  in  reduction  of  premium  and 
upon  the  basis  of  an  equal  percentage." 

CONNECTICUT  MUTUAL: 

"Answer — Annual,  and  applied  to  the  re- 
duction of  premiums,  as  the  policies  are  re- 
newable, the  same  year  in  which  the  dividend 
is  declared,  to-wit,  four  years  after  the  pre- 
mium was  paid,  and  on  the  basis  of  an  equal 
percentage." 

MASSACHUSETTS  MUTUAL  : 

"Answer — Heretofore  dividends  have  been 
paid  once  in  five  years  on  a  basis  of  equal  per- 
centage; hereafter  they  will  be  declared  and 
paid  annually  from  August  i,  1868.  Paid  in 
cash  to  all  who  have  paid  their  premiums  in 
cash,  and  deducted  from  the  loan  notes  of  all 
who  have  given  such." 

MUTUAL  BENEFIT  LIFE  : 

"Answer — Annually;  paid  at  renewal  of 
premium  in  the  second  year  after  being  de- 
clared ;  they  are  made  by  an  equal  percentage 
upon  premiums." 

36 


NATIONAL  LIFE  (Vt.)  : 

1  'Answer — Dividends  have  been  made  every 
fifth  year,  and  made  upon  basis  of  equal  per- 
centage. Hereafter  dividends  are  to  be  made 
annually/' 

NEW  ENGLAND  MUTUAL  : 

"Answer — Annually ;  surplus  to  be  returned 
according  to  the  contribution  of  members  to 
the  entire  surplus  to  be  divided." 

PHOENIX  MUTUAL  : 

"Answer  — Dividends  are  declared  annually 
and  are  to  be  applied  in  the  reduction  of  pre- 
miums. Dividends  are  based  on  an  equal  per- 
centage on  premiums  paid." 

UNION  MUTUAL  : 

"Answer — Surplus  is  apportioned  annually 
in  the  ratio  in  which  it  is  accumulated,  and  is 
paid  in  cash  the  fifth  year  thereafter." 

PENN  MUTUAL  : 

"Annual.  The  dividends  made  have  aver- 
aged 50  per  cent,  in  script,  and  are  receivable, 
three  years  after  they  are  declared  and  issued, 
in  reduction  of  premiums."  (Not  in  Wis.  in 
1870.) 

UNION  CENTRAL  LIFE: 

"Annual;  applied  in  additions  to  policies, 
cancellation  of  premium  notes  or  credits,  re- 
duction of  cash  premiums,  and  payments  in 
cash  to  policyholders."  (P.  184,  N.  Y.  Report, 
1870;  not  then  in  Wis.) 

37 


NORTHWESTERN  MUTUAL  LIFE  : 

"Dividends  declared  annually,"  and,  accord- 
ing to  statement  of  company,  were  applied,  in 
additions  to  policies,  in  cancellation  of  pre- 
mium notes  or  credits,  and  by  payment  in  cash 
to  policyholders.  (See  page  728,  N.  Y.  Ins. 
Dept.  Kept.  1869.) 

The  practice  of  every  other  company — conducted 
on  the  mutual  plan — then  doing  business  in  Wis- 
consin, was  in  harmony  with  Section  1952,  and  as 
outlined  in  the  answers  of  the  foregoing  com- 
panies. 

The  effort  of  companies  prior  to  1870  was  di- 
rected to  discover  the  most  equitable  manner  of 
distributing  the  surplus  accumulation,  and  not  to 
find  ways  and  means  to  defer  the  accounting  to  the 
policy  holder.  In  the  New  York  report  for  1863 
the  Commissioner  of  Insurance  said : 

"One  of  the  mooted  questions  of  actuarial  dis- 
cussion and  difference  has  been  the  most  equitable 
and  just  manner  of  distributing  surplus.  Un- 
doubtedly if  all  future  contingencies  could  be  ac- 
curately settled  in  advance,  the  most  equitable  dis- 
tribution would  be  no  distribution  at  all,  but  its  re- 
tention in  the  pockets  of  the  insured,  without  ever 
paying  it  over  to  a  company." 

In  the  report  of  1868  the  Commissioner  gives 
this  expression  of  his  opinion : 

"Policyholders'  burdens  should  be  lightened  by 
annual  dividends  with  the  second  annual  pre- 
mium." 

And  the  necessity  of  just  such  a  law  as  Section 
1952  is  shown  in  the  New  York  Report  of  1870, 

38 


when  the  Commissioner  calls  attention  to  the  con- 
ditions and  practices  then  springing  up : 

"It  is  believed  to  be  a  fact,  now  causing  quite 
general  complaint,  that  there  are  too  many  compli- 
cated schemes  or  plans  of  insuring,  and  conducting 
companies,  as  well  as  too  many  and  too  elaborate 
forms  of  contract  or  policy.  Each  new  company 
announces  some  new  feature  in  its  business,  which 
is  to  inure  greatly  to  the  advantage  of  the  insured. 
Although  it  may  be  said  that  life  insurance  in  this 
country  is  in  its  infancy,  sufficient  is  certainly 
known  of  its  great  principles  to  establish,  beyond 
much  doubt,  about  the  actual  value  of  insurance. 
This  done,  it  is  difficult  to  perceive  any  excuse  for 
the  promulgation  of  so  many  theories  and  schemes, 
except  upon  the  ground  that  they  are  intended  to 
accomplish  just  what  is  accomplished,  to  wit,  the 
entering  into  contracts  by  the  insured  the  true 
force  and  effect  of  which  they  do  not  understand. 
Let  the  companies  adopt  a  simple  and  uniform  sys- 
tem, and  forms  of  business  easily  understood,  and 
life  insurance  will  commend  itself  to  hundreds  of 
thousands  who  now  stand  afar  off  and  look  upon 
our  best  companies  with  distrust." 

To  the  wise  forethought  and  untiring  efforts  of 
the  Hon.  Elizur  Wright,  the  eminent  actuary  and 
distinguished  Insurance  Commissioner  of  Massa- 
chusetts, American  life  insurance  is  indebted  for 
the  legal  reserve  requirement,  and  non-forfeiture 
law,  and  no  authority  is  more  frequently  quoted 
than  this  forceful  advocate  of  correct  practices. 
In  pointing  out  the  necessity  of  short  periods  of 
division  of  surplus,  and  the  dangers  of  overac- 

39 


cumulation,  Elizur  Wright,  in  his  reports  covering 
the  period  of  1858-1867,  says : 

"When  surplus  accumulates  rapidly,  there  seems 
no  conclusive  reason  against  distributing  it  an- 
nually." 

"While  the  surplus  is  kept  accumulating,  the 
members  who  have  contributed  to  make  it  are  con- 
stantly passing  away.  Hence  the  importance  of 
frequent  periods  of  distribution." 

"This  surplus,  in  the  case  of  mutual  companies, 
belongs  to  the  insured,  from  whose  premiums  it 
has  accrued.  If  it  should  not  be  divided,  but  con- 
tinue accumulating  till  those  who  were  the  first 
contributors  to  it,  and  for  that  reason  probably  are 
the  most  largely  interested,  have  dropped  away  by 
death,  or  the  lapse  or  surrender  of  policies,  a  wrong 
will  be  done  which,  though  not  so  frightful  as 
bankruptcy,  may  be  as  extensive  in  its  transfer  of 
property  from  the  hands  of  its  owners  to  those  of 
strangers." 

By  returning  the  overpayment,  and  profit,  at  the 
end  of  the  year,  the  policyholder  is  placed  where 
he  would  have  been  had  such  cost  been  determin- 
able  at  the  beginning  of  the  year,  and  such  was  the 
practice  of  the  companies,  as  shown  by  their  sworn 
statements,  in  compliance  with  true  mutuality  and 
actual  cost,  until  the  "Equitable"  in  1869  presented 
its  Tontine  plan  of  insurance,  which  was  immedi- 
ately followed  by  the  enactment  of  Section  1952. 

And  this,  too,  is  the  requirement  of  the  Prussian 
Government.  No  American  life  insurance  com- 
pany can  there  issue  anything  else  but  an  annual 
dividend  contract,  and  so  zealous  is  the  Govern- 
ment that  perfect  equity  be  maintained  among  the 

40 


Prussian  policyholders  that  the  companies  in  mak- 
ing the  annual  distribution  of  surplus  are  required 
to  divide  the  policyholders  into  two  divisions,  so 
that  in  the  distribution  of  such  surplus  the  older 
policyholders  may  not  have  their  profits  decreased 
by  the  cost  of  obtaining  the  new  business,  and 
under  which  requirement  the  new  policies  are 
made  to  bear  their  own  cost. 

American  companies  there  comply  with  these  re- 
quirements, and  such  practice  would  also  have  been 
continued  here  by  compliance  with  the  provisions 
of  Section  1952. 

This  law  will  not  permit  of  a  forfeiture  of  the 
surplus  accumulation  to  which  a  policyholder  is  en- 
titled without  specific  agreement  and  consideration. 
The  vague  and  indefinite  provisions  in  the  contract 
as  to  the  deferred  distribution,  with  the  conditions 
as  to  the  acceptance  of  the  company's  determina- 
tion of  such  apportionment,  when  compared  with 
the  explicit  definite  provision  in  the  annual  divi- 
dend contract,  with  nothing  to  hide  or  conceal, 
clearly  shows  that  language  is  adroitly  used  to 
conceal  from  the  policyholder  the  forfeiture  the 
company  thereby  seeks  to  enforce,  when  conditions 
arise  which  are  beyond  the  control  of  the  insured. 

Non-forfeiture  laws  from  their  inception  would 
have  been  applied  to  surplus  accumulation,  as  well 
as  to  the  reserve,  but  for  the  fact  that  the  general 
practice  among  all  companies,  conducted  on  the 
mutual  plan,  was  that  of  short  period  accounting  to 
the  policyholder. 

It  required  but  a  comparatively  few  years 
after  the  adoption  of  the  legal  reserve  re- 
quirement, to  bring  about  a  legislative  recogni- 


tion  of  the  injustice  of  the  forfeiture  of  the  reserve, 
carried  on  each  policy  and  contributed  by  each 
policyholder,  by  the  enactment  of  the  non-forfeit- 
ure law ;  yet  while  but  eight  States  placed  this  law 
on  their  statute  books,  so  glaringly  unjust  was  such 
a  forfeiture,  that  all  companies  in  all  States  were 
compelled  to  grant  such  paid-up,  or  extended  in- 
surance in  the  event  of  lapse,  as  the  reserve  on  the 
policy  would  purchase.  So  explicit  is  the  law  of 
Massachusetts — the  first  State  to  enact  the  law — 
that  no  waiver  agreement  with  the  policyholder  is 
permitted,  and  applies  not  only  to  the  reserve,  but 
all  dividend  additions;  while  in  New  York,  the 
waiver  of  the  provisions  of  this  law  is  not  per- 
mitted without  a  specific  agreement  in  the  applica- 
tion, and  notice  of  such  waiver  must  be  written  or 
printed  in  red  ink  on  the  margin  of  the  first  page  of 
the  policy,  so  that  the  special  attention  of  the  in- 
sured may  be  directed  to  the  waiver. 

True,  competition  largely  aided  in  doing  away 
with  such  reserve  forfeitures,  but  that  was  possible 
only,  because  of  the  general  education  of  the  people 
who  insured  as  to  the  necessity  and  security  of  a 
reserve  on  each  policy,  and  this  being  understood 
as  meaning  the  payment  of  a  higher  premium,  the 
forfeiture  was  more  readily  appreciated  and  keenly 
felt,  while  the  gradual  growing  away  from  the  an- 
nual or  short  period  accounting  to  the  policyholder 
as  to  surplus,  and  attendant  forfeiture,  has  been 
obscured  by  the  "half-a-loaf  benefit"  which  the 
non-forfeiture  law  provisions  were  instrumental  in 
securing.  Had  there  been  an  enforcement  of  the 
provisions  of  Section  1952  on  all  companies,  with 
the  requirement  of  an  annual  or  periodical  state- 

42 


ment  to  each  policyholder,  there  would  have  long 
since  been  a  specific  law,  or  decision  of  the  courts, 
on  non-forfeiture  of  surplus  accumulations. 

And  the  forfeiture  of  surplus  accumulation  is 
even  more  vicious  than  was  that  of  the  reserve,  for 
it  represents  overpayments — that  sum  which  is 
more  than  needed  to  meet  all  requirements — the 
return  of  which  in  a  mutual  company  secures  to 
the  policyholder  his  protection  at  actual  cost,  and,  in 
thousands  of  cases,  the  use  of  which,  would  tide 
over  financial  embarrassment  in  the  payment  of 
premiums  and  keep  the  policy  in  force  to  protect 
the  family.  While  prior  to  the  adoption  of  the  non- 
forfeiture law  as  to  reserve,  American  life  insur- 
ance was  in  its  infancy,  largely  in  an  experimental 
stage,  groping  its  way,  one  company  alone  to-day 
having  ten  times  as  many  policies  in  force  as  were 
in  force  all  told  at  the  time  of  the  adoption  of  the 
non-forfeiture  law  by  Massachusetts,  while  the 
surplus  carried  to-day  by  life  insurance  companies 
is  nearly  twenty-two  times  greater  than  was  the 
sum  total  of  the  reserves  of  all  companies  at  that 
time,  so  that  the  evils  of  the  forfeiture  of  surplus 
accumulations  to-day  are  greater  and  more  wide- 
spread, and  with  the  experience  of  the  business, 
more  unjustifiable. 

A  conservative  estimate  would  place  the  equity 
of  Wisconsin  policyholders  in  this  fund  at  Ten 
Millions  of  Dollars;  so  that  this  amount  of  sur- 
plus, which  under  the  law  belongs  to  citizens  of 
the  State  of  Wisconsin,  constitutes  taxable  prop- 
erty as  much  as  any  other  kind  of  property  tax- 
able under  the  laws  of  that  State.  If  the  companies 
are  wrongfully  withholding  this  property  from  its 

43 


owners,  they  become  liable.  If  it  is  possible  for 
the  owners  to  agree  to  leave  their  accumulations 
with  the  companies,  then  each  owner  is  taxable  on 
the  amount  due  him  or  to  his  credit,  exactly  as  if 
the  sum  were  in  his  possession,  under  his  control. 

The  accumulation  is  not  in  any  way,  shape  or 
manner  a  part  of  the  insurance,  and  it  will  not  hold 
to  contend  that  to  tax  this  accumulation  would  be 
to  tax  the  insurance  taken  for  the  protection  of  the 
family. 

Example:  Two  men,  each  31  years  of  age, 
living  in  the  city  of  Madison,  each  carries  $10,000 
of  insurance  on  his  life,  which  has  been  in  force  for 
seven  years.  One  of  these  men  knew  enough  to 
insist  on  an  annual  dividend  contract,  and  in  the 
course  of  seven  years  the  company  has  returned 
him  $500  in  dividends,  which  he  has  invested  in  a 
small  lot  in  Madison,  or  in  personal  property,  upon 
which  he  is  compelled  to  pay  taxes. 

The  other  man,  to  whom  a  deferred  dividend 
policy  was  delivered,  has  also  had  an  accumulation 
of  $500  on  his  policy,  which  belongs  to  him,  though 
the  company  is  holding  it  for  him.  Can  exemption 
from  taxation  be  claimed  for  this  $500? 

Not  only  can  the  State  of  Wisconsin  tax  all  such 
deferred  surplus  accumulation,  but  every  other 
State,  in  which  a  Wisconsin  company  is  transacting 
business,  can  tax  the  accumulation  on  the  policies 
held  in  such  State. 

Another  phase  of  this  question  is  this :  A  man 
has  a  deferred  dividend  policy  of  life  insurance  for 
which  he  pays  an  annual  premium  of  $150,  which 
policy  is  made  payable  to  his  wife  and  children. 
On  this  policy,  in  the  course  of  time,  there  has 

44 


been  an  accumulation  of,  say,  three  hundred  dol- 
lars, which  absolutely  belongs  to  him,  and  which 
under  Section  1952  he  can  demand;  a  creditor  se- 
cures a  judgment  against  him;  can  it  be  claimed 
that  this  accumulation  is  exempt  from  execution? 

As  the  law  of  the  State  does  not  exempt  such  an 
accumulation,  there  can  be  no  such  claim  for  ex- 
emption under  the  Bankruptcy  Act  of  the  United 
States.  Not  even  the  rule  (Steele  vs.  Bull — 104 
Fed.  968)  as  to  cash  surrenders  will  here  apply, 
since  the  taking  of  the  cash  surrender  of  a  policy 
to  apply  to  the  claims  of  creditors  voids  the  entire 
policy  and  nullifies  the  protection  it  afforded  the 
family;  while  the  surplus  accumulation  is  not  an 
integral  part  of  the  life  insurance  policy,  but  a 
profit  beyond  it,  and  which  under  Section  1952  the 
policyholder  can  claim  as  his  own,  without  voiding 
in  any  manner  the  original  contract. 

Then  there  is  the  question  of  the  assignment  of 
such  a  deferred  dividend  policy.  Will  it  not  be 
necessary,  when  there  is  such  a  deferred  accumu- 
lation, to  specially  include  such  accumulated  sur- 
plus, since  under  Section  1952  it  is  something  dis- 
tinct and  separate  from  the  policy,  and  under  the 
law  belongs  to  the  insured,  and  an  assignment  of 
the  policy  will  not  carry  with  it  such  accumulated 
profits,  any  more  than  it  would  a  house  and  lot, 
except  specifically  mentioned. 

Section  1952  not  only  determines  when  the  ap- 
portionment of  surplus  shall  be  made — beyond 
which  the  apportionment  of  dividends  cannot  be 
deferred — but  it  also  determines  what  constitutes 
surplus. 

45 


Nor  can  there  be  a  waiver  of  this  statutory  pro- 
vision on  the  part  of  the  insured : 

"Now  the  law  is  well  settled,  that  where  a  stat- 
ute is  well  founded  upon  public  policy,  a  party  can- 
not waive  its  provisions  even  by  express  contract. 
The  contracts  of  private  persons  cannot  alter  a  rule 
established  on  grounds  of  public  policy." 
43  Wisconsin  457. 

"A  contract  between  a  life  insurance  company 
and  the  insured  whereby  the  latter  waives  his  statu- 
tory rights  is  ultra  vires  and  void." 

Griffith  vs.  New  York  Life  Ins.  Co. — 101  Cal.  627. 

"A  corporation  cannot  by  stipulations  in  its  con- 
tract avoid  or  withdraw  the  operation  of  a  statute 
of  the  place  where  it  does  business." 
Fletcher  vs.  New  York  Life  Ins.  Co.— 13  Federal  R.  528. 

No  such  waiver  by  express  agreement  has  been 
attempted,  nor  has  the  insured  entered  into  any 
specific  agreement  to  permit  a  forfeiture  of  the  sur- 
plus to  which  he  is  entitled  under  the  law.  The 
courts  will  not  enforce  a  forfeiture  without  such 
an  agreement  and  without  consideration,  the  en- 
forcement of  which  may  nullify  the  very  purpose 
for  which  the  insurance  was  taken. 

"In  a  doubtful  case  that  construction  is  preferred 
which  will  save  the  contract,  rather  than  one  which 
will  destroy  it." 

47  Wisconsin  89,  101. 
49  Wisconsin  389. 

"To  prevent  forfeitures  courts  are  bound  to  con- 
strue policies  as  strongly  against  insurer  and  as 
favorably  for  insured  as  their  terms  will  reasonably 
permit." 

74  Wisconsin  470. 

82  Wisconsin  112. 

46 


"Forfeitures  are  only  enforced  when  the  contract 
plainly  discloses  that  it  gives  that  right." 
39  Wisconsin  397. 
88  Wisconsin  589. 

Not  only  therefore  must  the  contract  plainly  and 
specifically  confer  the  right  of  forfeiture,  but  the 
company  must  first  do  perfect  equity  to  the  policy- 
holder  by  compliance  with  Section  1952,  the  pro- 
visions of  which  cannot  be  waived.  The  justice  of 
the  enforcement  of  this  statutory  provision  is  again 
shown  by  the  statement  that  the  estimated  equity 
of  ten  millions  of  dollars,  in  the  vast  and  un- 
necessary surplus,  which  the  citizens  of  Wisconsin 
have  absolutely  acquired  under  the  provisions  of 
this  law,  if  applied  as  reversionary  additions,  would 
add  something  like  Twenty-five  Millions  of  Dol- 
lars in  paid-up  insurance  to  the  policies  to  which 
the  accumulation  is  applicable. 

If,  however,  this  violation  of  Section  1952  is  to 
be  continued,  the  value  of  this  equity  may  be  re- 
alized when  it  is  understood  that  "this  stupendous 
surplus  is  accumulated  by  the  deferral  of  dividends, 
mostly  for  twenty  years,  on  policies  that  do  not 
remain  in  force  for  ten  years  on  the  average,  so 
that  the  average  insurant  comes  no  nearer  than 
within  ten  years  of  a  dividend  and  never  sees  one." 

Few  men  below  the  age  of  30  see  the  need,  or 
are  financially  able,  to  take  any  considerable 
amount  of  life  insurance;  so  that  the  great  ma- 
jority of  policies  are  written  on  men  between  30 
to  55  years  of  age,  and  as  the  greater  portion  of 
these  policies,  when  issued  by  the  deferred  divi- 
dend companies,  are  written  upon  a  twenty-year 
distribution  plan,  lapse  and  death  leave  but  a  com- 

47 


paratively  small  number  fortunate  enough  "to 
come  unto  their  own"  when  between  50  and  75 
years  of  age. 

This  evil  of  accumulation,  and  this  withholding 
of  the  surplus  from  its  owners,  on  the  part  of  the 
officers  of  these  purely  mutual  corporations,  has 
grown  to  such  enormous  proportions,  until  this 
fund  beyond  all  needs  and  requirements  amounts 
to  more  than  Three  Hundred  Millions  of  Dollars. 

And  yet  Section  1952  was  enacted  to  enforce 
such  equity  and  mutual  simplicity,  which  alone 
gives  the  protection  that  life  insurance  affords  at 
the  lowest  possible  cost,  and  which,  in  the  very 
nature  of  the  organization,  should  prevail  to  guard 
the  interests  of  the  policyholders,  who  form  and 
are  the  company. 

The  intention  of  the  Legislature  in  the  enact- 
ment of  Section  1952  must  have  been : 

TO  PREVENT  A  DEPARTURE  FROM  SHORT  PERIOD 
ACCOUNTING  TO  THE  POLICYHOLDER  ; 

the  only  other  interpretation  of  its  purpose  would 
be  that': 

ITS  PASSAGE  WAS  INSTIGATED  TO  ENABLE  COM- 
PANIES TO  EXTEND  THE  DISTRIBUTION  OF  SURPLUS 
AND  ACCOUNTING  TO  FIVE-YEAR  PERIODS. 

In  either  case  the  violation  is  equally  great  and 
indefensible,  as  evidenced  by  present  practices  and 
policy  conditions. 

Of  the  thirty-six  life  insurance  companies  at 
present  authorized  to  transact  business  in  Wiscon- 
sin, twenty-four  were  organized  prior  to  1870. 
The  Travelers  Insurance  Company  of  Hartford 
and  the  National  Life  Insurance  Company  of  the 
U.  S.  of  A.  were  purely  stock  corporations,  issuing 


purely  stock  contracts,  and  the  "Travelers"  has 
so  continued.  The  other  twenty-two  companies 
at  the  time  of  the  passage  of  the  law,  and  prior 
to  1870,  complied  strictly  with  an  annual  or 
short  period  distribution  of  surplus  and  account- 
ing to  policyholders ;  only  five  of  these  companies 
at  the  present  time  comply  with  the  requirements 
of  the  law,  while  the  general  practice  of  the  other 
twenty-two,  and  of  the  other  twelve  companies 
since  organized  and  admitted,  has  so  changed, 
that  each  company  now  has  various  periods  of  dis- 
tribution, varying  from  an  annual,  to  thirty-year 
periods,  although  the  ten,  fifteen  and  twenty  year 
periods  are  most  common,  so  that  in  fact,  eighty 
per  cent,  of  all  insurance  written  for  a  number  of 
years  has  been  on  such  deferred  dividend  plans. 

The  result  has  been  that  not  only  do  fewer  pol- 
icyholders receive  any  dividend  at  all,  but  those 
who  do  receive  them  are  deprived  of  much  to 
which  entitled,  by  reason  of  the  extravagant  ex- 
penditures which  followed  the  deferral  of  divi- 
dends as  a  natural  consequence. 

Prior  to  1870,  when  all  mutual  companies  ad- 
hered to  the  practice  of  short  period  accounting, 
the  commissions  for  obtaining  the  business — ac- 
cording to  the  sworn  statements  of  the  companies 
— varied  from  10  per  cent,  as  the  lowest,  to  25  per 
cent,  as  the  highest  commission  paid,  with  an 
extra  10  per  cent,  in  some  companies  for  brokerage 
business.  Since  the  deferral — mostly  for  twenty 
years — of  the  accounting  to  the  policyholder,  it 
has  been  a  common  practice  for  commission  pay- 
ments in  deferred  dividend  companies  to  vary  from 
70  per  cent,  to  95  per  cent.,  and  instances  have  been 

49 


numerous  where  the  agent  received  100  per  cent, 
and  a  bonus  for  the  business. 

It  would  require  too  much  space  to  give  all  the 
various  policy  provisions  as  to  distribution  of  sur- 
plus, and  comparison  is  therefore  only  made  with 
the  General  Form  employed  by  the  Annual  Divi- 
dend Companies,  with  the  most  common  forms  of 
the  Deferred  Dividend  Companies. 
ANNUAL  DIVIDEND  COMPANY: 

No  conditions  in  application  as  to  waiver  or  for- 
feiture of  surplus. 

Policy  provisions : 

"Distribution  of  Surplus. — This  policy  is  written 
upon  the  annual  dividend  plan,  and  beginning  with 
the  end  of  the  second  year  will  participate  annually 
in  profits  as  apportioned  by  the  company,  dividends 
being  due  and  payable  only  upon  the  payment  of 
the  next  succeeding  year's  premium.  Dividends 
may  be  applied  by  the  insured  in  any  one  of  the 
following  ways :  (i)  In  reduction  of  the  premium 
for  the  succeeding  year.  (2)  In  cash,  if  all  pre- 
miums required  under  the  terms  of  the  policy  have 
been  paid.  (3)  In  purchasing  paid-up  additions  to 
the  policy,  payable  with  the  policy." 

"Note. — The  additions  are  non-forfeitable  and 
share  in  the  profits  of  the  company,  and  in  case 
this  policy  is  surrendered  and  a  paid-up  taken,  the 
additions  will  be  added  to  the  amount  of  the  paid- 
up  insurance  stipulated  in  the  policy.  If  extended 
insurance  is  taken  instead  of  paid-up  insurance,  the 
reserve  value  of  the  additions  will  be  added  to  the 
reserve  value  of  the  original  policy  in  calculating 
the  term  of  extended  insurance.  The  additions  of 
past  years  may,  at  the  option  of  the  insured,  be 

50 


reconverted  at  any  time  into  cash;  the  same  to  be 
applied  toward  the  reduction  of  the  current  year's 
premium,  if  any." 
DEFERRED  DIVIDEND  COMPANY  : 

Conditions  in  application : 

"That  the  entire  contract  contained  in  the  said 
policy  and  in  this  application,  taken  together,  shall 
be  construed  and  interpreted  as  a  whole,  and  in 
each  of  its  parts  and  obligations,  according  to  the 
charter  of  the  said  company  and  the  laws  of  the 

State  of  ,  the  place  of  the  contract  being 

expressly  agreed  to  be  the  principal  office  of  the 
said  company  in  the  City  of ." 

"That  in  any  distribution  of  the  surplus  the 
principles  and  methods  which  may  be  adopted  by 
the  company  for  such  distribution,  and  its  deter- 
mination of  the  amount  equitably  belonging  to  the 
said  policy,  shall  be  and  are  hereby  ratified  and  ac- 
cepted by  and  for  every  person  who  shall  have  or 
claim  any  interest  under  the  contract  now  pro- 
posed." 

"That  all  right  or  claim  to  any  surrender  value 
for  the  policy  hereby  applied  for,  other  than  such 
as  may  be  stipulated  in  the  policy,  is  hereby  ex- 
pressly waived  and  relinquished,  whether  provided 
for  by  the  statute  of  any  State  or  not." 

The  majority  of  deferred  dividend  companies 
make  no  attempt  of  any  kind  as  to  a  waiver  or  for- 
feiture provision  as  to  surplus  in  the  application. 

Policy  conditions : 

Form  I. — "If  the  assured  be  living,  and  this 

policy  is  in  force  on  the  —  day  of ,  nineteen 

hundred  and  -       — ,  the  society  will  pay  to  the 
assured,  or  assigns,  a  cash  dividend,  consisting  of 

51 


the  policy's  full  share  of  surplus  profits,  as  deter- 
mined by  the  actuaries  of  the  society,  and  this  pol- 
icy may  then  be  continued  or  surrendered  by  said 
assured,  or  assigns,  etc."  "Until  said  date  no  such 
cash  dividend  shall  be  apportioned  to  this  policy." 

Form  2. — "This  policy  is  issued  on  the  Semi- 
Tontine  Plan,  and  its  Tontine  Dividend  Period  is 
twenty  years." 

"This  policy  shall,  if  kept  in  force,  share  in  the 
surplus,  according  to  the  company's  usage,  at  each 
distribution  after  twenty  years  from  date  hereof, 
until  all  contributions  to  the  surplus  fund  in  the 
course  of  making  such  distributions  to  have  arisen 
from  this  policy  shall  have  been  returned;  but  no 
dividend  shall  be  payable  at  or  after  the  time  de- 
fault may  be  made  in  payment  of  any  premiums." 

"No  dividend  shall  be  allowed  or  paid  upon  this 
policy,  unless  the  insured  shall  survive  the  com- 
pletion of  the  Tontine  Dividend  Period  and  unless 
the  policy  shall  then  be  in  force." 

Form  3. — "Participation  in  Profits — This  policy, 
while  in  force,  under  its  original  terms  and  condi- 
tions, will  participate  annually  in  the  surplus  of 
the  company  as  herein  provided,  which  dividends 
or  profit  shall  be  retained  by  the  company  and  ac- 
cumulated until  the  expiration  of  twenty  years 
from  the  first  day  of  February,  nineteen  hundred 
and  two,  at  which  time  only,  if  the  insured  be  liv- 
ing and  the  whole  of  the  premiums  to  that  date 
have  been  duly  paid,  such  accumulation  shall  be- 
come due  and  payable  to  the  insured,  in  accordance 
with  one  of  the  following  dividend-endowment 
options." 

52 


Form  4. — The  Accumulation  Period  hereunder 
ends  on  the  fifteenth  day  of  May,  nineteen  hundred 
and  twenty-two.  If  the  assured  is  then  living,  and 
if  the  premiums  have  been  duly  paid  to  that  date, 
and  not  otherwise,  the  Society  will  then  apportion 
hereto  the  share  of  the  profits  to  which  this  policy 
may  then  be  entitled." 

The  following  additional  provision  appears  in 
the  policy  in  connection  with  Form  4 :  "And  it  is 
further  understood  and  agreed,  as  a  condition  pre- 
cedent to  the  acceptance  of  this  contract,  that  the 
minds  of  the  contracting  parties  as  to  the  said  de- 
termination and  apportionment  of  profits  have 
fully  met,  anything  to  the  contrary  notwith- 
standing/' 

Form  5. — "If  this  policy  is  in  force  on  the 

day  of  19 —  (twenty  years  from  date  ot 

policy),  it  will  be  entitled  to  a  return  of  the  sur- 
plus accumulated  from  the  premiums  paid  on  this 
policy  as  computed  by  the  Society,  etc." 

Form  6. — "The  first  distributive  share  of  sur- 
plus shall  be  apportioned  to  this  policy  at  the  ex- 
piration of  twenty  years  from  date,  provided  the 
premiums  are  duly  paid  and  the  insured  is  then 
living,  etc." 

The  contract  is  prepared  by  the  officers,  and 
while  it  is  their  duty  to  fully  specify  all  the  rights 
of  the  company,  they  cannot  take  advantage  of 
vague  and  indefinite  forfeiture  allusions,  to  which 
the  insured  never  consented  and  for  which  he  has 
received  no  consideration,  and  the  enforcement  of 
which  may  nullify  the  very  purpose  for  which  the 
insurance  was  taken.  When  urged  by  the  agent  to 
sign  the  application,  the  insured  has  presented  to 

53 


him  the  benefits  to  be  derived  from  the  company's 
surplus  and  is  led  to  believe  in  a  return  to  him  of 
dividends,  but  nothing  is  said  of  the  forfeiture  of 
his  overpayments  and  profits. 

Forfeiture  is  repugnant  to  the  very  nature  of  an 
organization  in  which  there  should  be  the  strictest 
equity  and  a  minimum  of  gambling  element,  and  in 
which  none  should  benefit  by  the  misfortune  of 
the  other. 

No  deferred  dividend  provision  in  any  such 
policy  contains  a  specific  waiver  of  statutory  pro- 
visions, or  contains  a  specific  agreement  with  the 
insured  as  to  the  forfeiture  of  his  surplus ;  the  only 
indirect  reference  to  forfeiture  is  in  the  phrase: 
"If  this  policy  is  in  force,"  or  "if  the  insured  be 
living  and  the  premiums  have  been  paid." 

The  perfect  equity  which  mutuality  enjoins  must 
lead  to  the  further  conclusion  that  a  purely  mutual 
company  cannot  under  any  circumstances  issue  a 
non-participating  contract ;  if  the  premium  is  more 
than  sufficient  to  carry  the  risk,  an  injustice  is  done 
the  insured — if  insufficient,  it  places  an  unfair  bur- 
then on  the  other  policyholders.  On  the  other 
hand,  a  stock  company,  conducted  on  the  mutual 
plan,  can  only  issue  such  a  non-participating  con- 
tract by  a  specific  agreement  with  the  insured  that 
"for  and  in  consideration  of  the  reduced  premium 
on  this  form  of  policy — which  is  guaranteed  by  the 
capital  stock  of  the  company  and  not  by  the  contri- 
butions of  the  participating  policyholders — the  in- 
sured waives  all  rights  and  interest  in  the  partici- 
pation of  the  profits  of  the  company." 

The  Penn.  Mutual  has  the  following  provision  in 
its  non-participating  contracts : 

54 


"In  consideration  of  the  reduced  rate  of  pre- 
mium upon  this  policy,  all  claim  for  distribution 
of  surplus  is  waived  by  the  claimants  hereunder,  of 
which  waiver  the  acceptance  of  the  policy  is  due 
and  sufficient  acknowledgment." 

The  Mutual  Life  of  New  York  has  this  provision 
in  its  non-participating  contracts : 

"This  policy  is  issued  on  the  non-participating 
plan  at  a  reduced  rate  of  premium,  and  no  surplus 
shall  be  apportioned  to  it  at  any  time." 

Other  companies  issuing  this  form  of  contract 
either  make  no  reference  to  dividends  or  surplus, 
or  refer  to  the  non-participation  by  the  statement : 
"This  policy  shall  not  participate  in  any  distribu- 
tion of  surplus,"  while  others  are  content  to  insert 
the  words  "without  participation  in  surplus  or 
dividends,"  "without  profits,"  or  "non-participat- 
ing;" neither  the  application  nor  contract  contain- 
ing any  specific  agreement  as  to  waiver  of  overpay- 
ments and  profits  on  the  part  of  the  insured. 

The  mere  statement  in  the  policy  "This  policy 
shall  not  participate  in  any  distribution  of  surplus" 
is  not  a  waiver  on  the  part  of  the  insured,  and  does 
riot  authorize  a  company,  conducted  on  the  mutual 
plan,  to  withhold  from  the  insured  the  excess  pay- 
ments and  the  equitable  share  of  the  profits  of 
this  class  of  policies.  This  is  true,  not  only  for  the 
reason  that  in  such  a  company  all  policyholders — 
without  special  agreement  and  consideration — have 
equal  rights  and  are  entitled  to  equitable  benefits, 
but  also  because  the  mere  amount  of  the  premium 
paid  is  not  the  factor  controlling  participation. 
There  are,  for  example,  the  Participating  Term, 
Renewable  Term  and  Convertible  Term  contracts  of 

55 


some  companies,  which  are  issued  at  a  premium 
rate  of  nearly  thirty  per  cent,  less  than  is  the  ordi- 
nary life  non-participating  rate  of  other  companies 
conducted  on  the  mutual  plan;  while  the  reserve 
requirements  on  these  contracts  differ,  it  is  never- 
theless true  that  the  premium  on  each  form  has  a 
margin  of  saving  and  profit,  and  that  the  amount 
of  the  premium  of  itself  does  not  control  participa- 
tion. To  make  the  amount  of  the  premium  the 
consideration  for  non-participation,  its  sufficiency 
must  be  guaranteed  by  something  beyond  the  pre- 
miums of  the  other  policyholders. 

Non-participating  policies  bring  out  more  glar- 
ingly the  injustice  done  the  participating  policy- 
holder  in  withholding  surplus  accumulations. 

*  "The  record  shows  that  the  average  dividend 
paid  to  the  policyholders  in  1901  by  the  life  insur- 
ance companies  in  this  country  on  partici- 
pating policies  was  under  eight  per  cent. 
The  mutual  (or  participating)  rate  for  pre- 
miums is  in  most  cases  more  than  twenty- 
two  per  cent,  higher  than  the  minimum  non-par- 
ticipating rate  which  may  be  safely  charged.  It  is 
true  that  the  'deferred  dividend'  device  puts  off 
the  day  of  reckoning  somewhat,  but  it  must  come 
all  the  same.  Using  the  money  accumulated  from 
large  premium  payments  to  get  business  at  extrava- 
gant rates  of  expenditure,  under  the  delusion  that 
'after  us  comes  the  deluge,'  will  not  always  be 
tolerated  by  the  intelligent  insuring  public." 

It  would  strike  an  interested  observer  that  if  the 
average  participating  rate  charged  is  twenty-two 
per  cent,  higher  than  the  insurance  can  be  obtained 
*The  Insurance  Herald. 

56 


on  the  non-participating  plan,  the  average  dividend 
returned  to  the  participating  policyholder  should  be 
at  least  twenty-two  per  cent. ;  if  this  is  not  done,  the 
rate  for  the  non-participating  policies  is  either  too 
low  or  the  company  is  withholding  the  dividend  to 
which  the  participating  policyholder  is  entitled. 

The  record  also  shows  that  the  increase  in  sur- 
plus accumulations  during  the  year  1901  was 
twenty-four  millions  of  dollars. 

In  the  deferred  dividend  companies  transacting 
business  in  Wisconsin,  30,470  policies  were  lapsed 
in  that  State  during  the  past  six  years,  and  fully 
eighty  per  cent,  of  the  77,910  policies  in  force  in 
these  companies  in  that  State  are  on  some  deferred 
dividend  plan. 

Had  life  insurance  companies  adhered  to  their 
original  teachings  and  practices,  laws  taxing  pre- 
mium income  would  never  have  so  favorably  ap- 
pealed to  the  legislator;  but  it  is  difficult  for  the 
average  man  to  understand  that  these  companies, 
with  their  extravagant  expenditures  and  forfeiture 
impositions,  are  conducted  solely  in  the  interest  "of 
the  policyholders,  and  that  there  can  be  equity  and 
mutuality  in  withholding  from  its  owners  more 
than  three  hundred  millions  of  dollars  not  neces- 
sary for  the  conduct  of  the  business. 

Failure  on  the  part  of  the  directors  of  companies 
to  exercise  the  option  of  extending  the  period  of 
distribution  of  surplus  to  two,  three,  four  or  five 
years  cannot  excuse  the  evasion  of  an  annual  dis- 
tribution. The  question  naturally  arises  how  such 
annual  dividend  is  to  be  treated  in  connection  with 
one-year  policies  on  which  the  lapse  ratio  is  very 
great,  as  well  as  the  effect  of  a  declared  dividend 

57 


where  the  policy  provisions  provide  for  a  dividend 
after  two,  three  or  five  years. 

Dividends  declared  are  payable  on  the  date  upon 
which  the  next  year's  premiums  fall  due ;  and  hav- 
ing been  declared,  will  the  company  not  be  com- 
pelled, if  the  premium  should  not  be  paid,  to  carry 
the  policy  along  for  such  length  of  time  as  the  divi- 
dend to  the  credit  of  the  insured  will  continue  it 
before  the  policy  can  legally  lapse.  And,  there 
being  no  obligation  on  the  part  of  the  insured  to 
continue  payments  of  premiums,  cannot  such  in- 
sureodemand  the  payment  of  the  declared  dividend, 
even  though  the  policy  is  not  continued  in  force  by 
premium  payment  ? 

"The  insurer  cannot  add  the  condition 
that  the  insured  shall  renew  his  policy  by 
paying  the  next  installment  to  become  due 
before  it  will  allow  him  to  participate  in 
the  surplus  already  earned  by  the  class  to 
which  his  policy  belonged." 

Aetna  Life  Ins.  Co.  v.  Hartley — Court  of  Appeals,  Ky.,  67, 
SW.  R.  19. 

Since  the  cost  of  life  insurance  is  the  difference 
between  the  premium  and  the  dividend,  the  dec- 
laration of  the  amount  of  the  dividend  fixes  the 
amount  of  the  overpayment  by  the  insured,  and  the 
mere  fact  that  he  does  not  desire  to  continue  the 
insurance  does  not  authorize  depriving  him  of  the 
amount  which  the  company  by  its  declaration  stated 
was  more  than  required  during  the  time  the  risk 
was  carried. 

As  the  factors  which  make  up  the  cost  are  deter- 
mined annually,  it  cannot  even  be  claimed  that  Sec- 
tion 1952  is  too  stringent  a  requirement  to  impose 

58 


on  the  companies,  since  it  grants  to  the  directors — 
instead  of  leaving  it  to  a  determination  by  the  mem- 
bers— the  option  of  extending  the  distribution  to 
five-year  periods,  whereas  the  interest  of  the  pol- 
icyholder  would  be  best  served  by  confining  its  re- 
quirements entirely  to  an  annual  accounting. 

With  such  an  accounting  economy  and  results  to 
the  policyholder  will  be  the  only  factors  to  deter- 
mine the  merit  of  the  company. 


59 


IV.— LARGE  SURPLUS  ACCUMULATIONS 
NOT  NECESSARY. 


A  large  surplus  is  not  the  evidence  and  guaran- 
tee of  strength,  but  a  small  surplus  may  be  the 
evidence  of  the  fair  treatment  accorded  policyhold- 
ers ;  while  the  large  surplus  must  be  an  evidence  of 
the  withholding  for  a  long  period  the  overpayments 
and  profits  which  should  rightfully  be  returned  to 
.  the  members  of  the  company. 

The  theory  that  surplus  may  not  be  safely  re- 
duced to  a  minimum  is  entirely  fallacious.  How 
little  of  reason  in  the  strenuous  contentions  for  a 
large  surplus  "to  guard  against  unforeseen  con- 
tingencies" is  shown  by  an  examination  of  the  con- 
ditions pointed  to  "as  possible  to  arise." 

These  conditions  are  said  to  be: 

First — Depreciation  of  assets. 

Second — Interest  below  rate  assumed. 

Third — Abnormal  death  rate. 

These  three  contingencies,  and  these  three  alone, 
are  pointed  to  and  would  justify  a  large  accumu- 
lation of  surplus,  yet  if  we  examine  the  experience 
of  the  companies  we  find  in  them  but  little  to  sus- 
tain the  advocates  of  a  large  accumulation. 
Depreciation  of  Assets. 

There  is  little  danger  of  actual  loss  from  depre- 
ciation of  assets;  in  fact,  judicious  management, 
and  investments  in  the  class  of  securities  in  which 
life  insurance  funds  may  be  placed,  shows  that  fluc- 
tuation will  rather  exceed  loss  from  depreciation 
in  every  well  conducted  company. 

'60 


The  experience  of  twenty-five  companies  report- 
ing to  the  Insurance  Department  of  Massachusetts 
for  a  period  of  twenty-two  years — 1880-1901  in- 
clusive— shows  this  result  as  to  danger  from  de- 
preciation : 

Net  gain  by  investments  : 

1880  to  1889  inclusive $13,835,011  oo 

1890  to  1899  inclusive 23,662,685  oo 

For  year  1900 8,955,301  oo 

For  year  1901 8,500,322  oo 

Total  gain  by  investments,  22  years. $54,953,3 19  oo 
Interest  Below  Rate  Assumed. 

The  law  requires  each  company  to  accumulate  a 
reserve  on  each  policy,  and  this  reserve  is  derived 
from  the  premiums  paid  by  the  policyholder,  and 
such  a  reserve,  calculated  in  accordance  with  the 
experience  of  mortality  tables,  compounded  at  a 
certain  rate  of  interest,  makes  possible  a  fixed,  or 
level  premium;  for,  as  the  risk  increases  with  in- 
creasing age,  the  accumulating  reserve  is  decreas- 
ing the  liability  of  the  company,  so  that  the  reserve 
is  really  the  equalizer  between  the  premium  fixed 
at  entry,  and  the  increasing  hazard  of  increasing 
age.  Such  scientifically  correct  reserve  requires  in 
its  accumulation  a  certain  rate  of  interest,  which 
the  law  fixes  at  not  exceeding  four  and  one-half 
per  cent. ;  few  companies,  however,  assume  a  high- 
er rate  than  four  per  cent,  on  old  business,  while 
the  reserve  on  new  business  is  calculated  on  a  three 
and  one-half,  or  three,  per  cent,  basis.  Should, 
therefore,  a  company  not  realize  the  interest  rate 
assumed  in  compounding  its  reserve,  there  would 

61 


be  a  deficit,  which  could  be  met  only  by  a  draft  on 
surplus  to  prevent  impairment. 

The  average  annual  rate  of  interest  earned  on 
mean  invested  funds  during-  the  period  1882-1901 
inclusive  was  5.01  per  cent.  Taking  the  experience 
of  the  twenty-five  companies  reporting  to  Massa- 
chusetts, we  find  that  during  the  period  1880-1901 
inclusive,  the  interest  earnings  over  and  above  the 
requirements  of  the  reserve  to  have  been  as  fol- 
lows: 

1880  to  1889  inclusive $84,399,671  oo 

1890  to  1899  inclusive 138,789,291  oo 

For  year  1900 17,919,412  oo 

For  year  1901 19,303,486  oo 


Total  gain  from  interest  in  ex-    >  $2(5o        g6o  ^ 

cess  of  reserve  requirements.    \  T 
Abnormal  Death  Rate. 

By  an  abnormal  death  rate  is  meant  death  losses 
beyond  those  expected  by  the  table  of  mortality 
upon  which  the  premium  has  been  calculated.  No 
conservatively  managed  old  line  company  has  suf- 
fered from  an  abnormal  death  rate.  Improved 
sanitary  conditions  and  improved  methods  in  the 
treatment  of  disease,  with  the  fact  that  a  com- 
pany deals  only  with  selected  lives,  have  given  the 
companies  a  large  gain  on  the  mortality  charge 
calculated  on  mortality  tables  formulated  over 
forty  years  ago.  With  an  accumulating  reserve  to 
decrease  the  liability  of  the  company,  and  a  mor- 
tality charge  in  excess  of  requirements,  there  is 
little  danger  from  an  abnormal  death  rate. 

The  experience  of  the  twenty-five  companies  re- 
porting to  Massachusetts  shows  savings  in  mor- 

62 


tality  and  lapse  gain,  for  twenty-two  years,  as  fol- 

lows : 

1880  to  1889  ...................  $79,177,678  oo 

1890  to  1899  ...................  151,398,680  oo 

For  year  1900  ..................   19,298,439  oo 

For  year  1901  ..................   16,116,553  oo 


} 


^5,991,350 


We  find,  therefore,  that  these  "unforeseen  con- 
tingencies," offered  as  the  excuse  for  large  surplus 
accumulations,  have  given  the  following  gains  dur- 
ing the  past  twenty-two  years: 
Gain  from  investments  ..........  $54>953>3J9  °° 

Gain  from  interest,  above  reserve 

requirements   ..............   260,411,860  oo 

Gain     from    mortality    including 

lapse  gain  .................  $265,991,350  oo 


Total  gain $5^1,356,529  oo 

It  would  almost  seem  that  the  advocates  of  large 
surplus  accumulations  would  be  compelled  to  offer 
some  other  dangers  to  prevent  the  distribution  of 
'be  surplus  to  its  owners.  Most  any  other  business 
would  welcome  just  such  "unforeseen  contin- 
gencies," and  the  above  figures  represent  only  the 
results  of  twenty-five  companies — twenty  of  which 
transact  business  in  Wisconsin — while  seventy- 
four  companies  are  now  transacting  business  in 
the  United  States. 

If  the  Equitable  Life  were  to  distribute  its  en- 
tire surplus  of  $71,160,385.56  and  the  apportion- 
ment was  made  to  the  policyholders,  the  entire 
clerical  force  of  the  company  could  not  issue  the 


checks,  address  the  envelopes  and  place  them  in 
the  mail,  before  the  company  would  again  be  ac- 
cumulating a  surplus,  notwithstanding  "unfore- 
seen contingencies." 

If  the  Northwestern  Mutual  Life  should  return 
every  dollar  of  the  $30,209,545.85  of  policyhold- 
ers'  surplus,  and  then,  from  every  possible  and  im- 
possible contingency,  should  incur  an  impairment 
of  twenty-five  per  cent,  on  its  reserve,  the  profits 
from  the  "unforeseen  contingencies" — interest, 
lapse  and  mortality — would  make  up  the  impair- 
ment in  less  than  six  years,  if  the  company  did  not 
issue  a  single  additional  policy.  With  such  re- 
cuperative powers  under  such  extreme  and  impos- 
sible conditions,  no  harm  can  come  from  applying 
the  provisions  of  Section  10,52. 

"Premiums  are  purposely  fixed  on  a  higher  scale 
than  is  necessary  to  meet  the  actual  conditions  of 
the  business  so  far  existing,  in  order  that  more  ad- 
verse conditions  may  be  met  if  they  should  chance 
to  arise  in  the  future." 

In  no  year  in  the  history  of  any  American  life 
insurance  company  complying  with  the  require- 
ments of  the  legal  reserve  and  investment  laws, 
has  there  been  such  depreciation  of  assets,  but 
what  interest  earnings  and  savings  in  mortality 
more  than  overbalanced  any  possible  loss.  Nor 
has  any  company  complying  with  these  laws  ever 
become  impaired  by  reason  of  an  annual  distribu- 
tion of  the  surplus. 

If  life  insurance  companies  in  their  early  history 
were  enabled  to  make  an  annual  distribution,  when 
there  was  more  danger  from  impairment  and  "un- 
foreseen contingencies,"  how  much  better  able  are 

64 


the  companies  to  do  so  now,  with  the  experience 
of  nearly  fifty  years  of  application  of  the  legal  re- 
serve and  non-forfeiture  laws. 

When  the  policyholder  once  realizes  the  possi- 
bilities of  "unforeseen  contingencies"  and  invokes 
the  strong  arm  of  the  law,  there  will  be  an  end  to 
enormous  surplus  accumulations,  and  that,  too, 
will  end  the  extravagant  expenditures  in  the  pur- 
suit of  business  that  have  been  for  years  a  scandal 
and  a  reproach  to  the  companies. 

The  right  of  the  State  to  repulate  and  supervise 
and  to  prescribe  conditions  to  all  corporations  de- 
siring to  transact  business  within  its  bounds  has 
been  settled  beyond  question : 

"A  corporation  is  an  artificial  person  created  by 
a  sovereign.  It  has  no  functions  except  those  de- 
fined by  its  creator  and  no  sphere  of  operation  out- 
side of  the  boundaries  of  his  power." 

U.  S.  Supreme  Court — Bank  of  Augusta  vs.  Earle,  13 
Peters  519. 

"Corporations  have  no  right  of  recognition  in 
other  States,  except  under  the  laws  of  such  other 
States." 

Liverpool  &  London  vs.  Oliver,  10  Wallace  566. 

It  is  the  true  function  of  government  to  encour- 
age that  which  is  right  and  just,  and  to  prohibit 
anything  which  is  wrong  and  injurious,  and  in  the 
enactment  of  its  laws  it  should  aim  only  in  secur- 
ing justice  to  its  citizens. 

If,  however,  a  reasonable  amount  of  surplus  is 
necessary  for  a  life  insurance  company,  the  law 
should  be  amended  to  permit  such  a  reasonable  ac- 
cumulation, and  in  the  determination  as  to  what 
constitutes  a  reasonable  surplus,  taxation  properly 
applied  will  offer  the  solution. 

65 


Aside  from  surplus,  a  life  insurance  company 
has  absolutely  nothing  except  what  the  laws  com- 
pel it  to  have ;  its  assets  are  offset  by  its  liabilities. 
Aside  from  surplus,  of  which  a  large  accumulation 
is  unnecessary,  the  payments  or  funds  of  the  pol- 
icyholders  pass  to  the  company  only  to  be  held  in 
trust  until  payment  can  be  made  to  the  dependents 
of  these  policyholders,  and  in  this  manner  the  small 
contributions  of  the  many  are  returned  to  the 
channels  of  taxation  in  larger  payments,  the  com- 
pany forming  only  the  medium  for  the  transaction. 

When  the  legislator  once  understands  what  is 
meant  by  mutuality  and  actual  cost  in  life  insur- 
ance, then  the  only  proper  tax  to  impose  upon  a 
company,  conducting  its  business  on  the  mutual 
plan,  will  be  a  tax  on  surplus  accumulations  upon 
the  same  basis  as  all  other  property  is  taxed. 

Life  insurance  has  become  so  necessary  a  factor 
in  our  social  economy  and  so  powerful  an  aid  to 
the  well-being  of  the  people  and  every  community 
that  its  conduct  and  growth  should  be  encouraged 
and  enforced  by  the  State  only  along  correct  lines, 
so  that  its  greatest  good  may  come  to  the  greatest 
number,  and  any  means  that  will  lessen  the  cost,  by 
bringing  about  a  competition  of  economy  of  man- 
agement, and  thus  bring  it  nearer  to  the  people, 
must  be  welcomed  as  a  great  and  lasting  reform. 

The  enforcement  of  Section  1952  and  compelling 
a  short  period  accounting  would  place  all  com- 
panies, large  and  small,  old  and  new,  on  an  equal 
footing  in  the  competition  for  business,  and  all 
rivalry  between  companies  would  be  wholly  in  the 
interest  of  the  policyholder  and  give  to  him  PER- 
FECT EQUITY  AND  ACTUAL  COST. 

66 


V.— TAXATION. 


As  reference  has  been  made  to  the  possibility  of 
taxation  under  the  law  governing  the  distribution 
of  surplus,  it  may  be  well  to  explain  why  such  a 
tax  is  the  only  proper  one  to  impose  upon  life  in- 
surance. 

A  tax  upon  the  premiums  of  a  life  insurance 
company,  conducted  on  the  mutual  plan,  is  a  tax 
not  only  upon  the  amount  received,  but  also  upon 
the  amount  distributed  for  losses.  It  is  a  tax  upon 
the  thrift  of  the  citizens  of  the  State,  who,  because 
of  their  wise  forethought  and  love  of  family,  are 
insuring  themselves,  thus  not  only  relieving  the 
State  from  the  support  of  dependents,  but  by  rea- 
son of  such  insurance  are  enabling  such  depend- 
ents to  become  tax  contributors  for  the  support  of 
the  State. 

Setting  aside  all  sentiment  about  the  blessings 
and  beneficence  of  life  insurance,  the  man  who 
carries  life  insurance  is  a  better  citizen  of  the  State 
than  the  man  who  does  not  insure.  Poorhouses 
and  homes  for  the  friendless  are  not  peopled  by 
the  dependents  of  the  man  who  carried  life  insur- 
ance, but  the  prudent  man  by  a  tax  on  life  insur- 
ance premiums  is  taxed  for  being  prudent,  and 
then  he  is  again  taxed  for  the  public  support  of  the 
dependents  of  those  who  were  not  prudent. 

A  tax  imposed  upon  any  part  of  the  premium  is 
most  unequal  and  unjust.  The  premium  is  com- 
posed of  the  INSURANCE  ELEMENT — made  up  of 
the  reserve  and  mortuary  charge — and  the  EX- 
PENSE ELEMENT. 

67 


The  law  requires  each  company  to  accumulate 
a  reserve  and  compound  it  at  a  certain  rate  of  in- 
terest ;  every  dollar  of  this  reserve  is  a  liability  and 
is  so  declared  by  law.  Having,  therefore,  by  law 
compelled  its  creation,  it  is  manifestly  unfair  to 
impose  the  additional  burthen  of  a  tax  on  this  re- 
serve, the  very  purpose  of  which  is  to  insure  to 
the  dependents  of  the  policyholders  an  independent 
support. 

The  injustice  of  a  tax  upon  the  mortuary  charge 
of  the  premium  finds  peculiar  recognition  in  the 
laws  of  Wisconsin,  and  in  the  political  platforms  of 
both  the  Republican  and  Democratic  party,  where, 
in  the  declaration  in  favor  of  a  just  and  equal 
method  of  taxation,  fraternal  orders  and  associa- 
tions are  especially  exempted. 

The  funds  of  these  organizations  being  only 
Mortuary  and  Expense,  with  no  provisions  for 
future  losses,  they  are  exempt  from  taxation 
simply  and  solely  because  of  the  bond  of  mutual- 
ity, by  means  of  which  they  conduct  their  transac- 
tions, and  which  constitutes  their  greatest  strength. 
The  legislator  without  difficult^  can  readily  under- 
stand that  such  an  organization  is  simply  the  band- 
ing together  of  a  large  number  of  individuals  to 
protect  each  other  and  their  dependents  by  mutual 
contributions,  and  that  in  the  very  nature  of  the 
organization  there  can  be  no  profit  in  a  commercial 
sense  to  any  one.  If  the  legislator  cannot  under- 
stand the  scope  of  such  an  organization,  the  very 
mutuality  commences  a  practical  illustration  of  its 
power  and  becomes  a  political  factor. 

Yet  life  insurance  companies  are  not  essentially 
different — their  purpose  is  the  same — and  by  the 

68 


application  of  true  mutuality  would  differ  only  in 
that,  recognizing  an  increasing  death  rate  must 
come  with  increasing  age,  they  gauge  the  cost  of 
protection  on  mortality  tables  and  provide  in  the 
insurance  element  of  the  premium  for  a  fund 
called  Reserve,  to  meet  the  future  increasing  cost ; 
so  that  a  life  insurance  company  practicing  the 
equity  enjoined  by  mutuality  is  enabled  to  grant  a 
fixed  amount  of  protection  at  a  decreasing  cost, 
while  the  fraternal  organization,  without  such  a 
Reserve,  can  only  grant  protection  at  an  increasing 
cost. 

Mutuality  dictates  that  all  policyholders  have 
equal  rights  and  share  equitably  in  all  the  burthens 
and  advantages  which  such  a  community  of  inter- 
est imposes,  and  where  a  life  insurance  company  is 
conducted  on  these  lines,  it  differs  only  from  the 
fraternal  organization,  so  far  as  the  legal  reserve 
gives  to  the  company  financial  strength  and  per- 
manence. 

Even  if  a  tax  could  be  imposed  on  the  Expense 
Element  of  the  premiums  alone,  it  would  be  no  less 
unjust  than  when  imposed  on  the  Insurance  Ele- 
ment. The  inequality  of  such  tax  is  shown  when 
it  is  understood  that  the  Expense  Element  is  a  per- 
centage loading,  varying  from  ten  to  forty  per 
cent,  according  to  the  different  forms  of  policies, 
so  that  in  a  company,  issuing  twenty  forms  of  poli- 
cies, twenty  men,  even  of  the  same  age,  each  taking 
a  different  form  of  policy  but  all  carrying  a  like 
amount  of  insurance,  every  one  of  these  men  would 
contribute  to  such  a  tax  in  varying  amounts;  and 
again,  the  premium  being  lower  for  younger  ages, 
the  young  man  contributes  less  toward  such  a  tax 

69 


than  would  the  older  man  for  the  same  amount  of 
insurance. 

A  tax,  therefore,  upon  the  premium,  or  any  part 
of  it,  is  unjust,  unfair  and  unequal,  while  a  tax 
upon  annual  surplus  accumulation,  would  be  just, 
fair  and  uniform. 

The  reserve  of  a  company  is  a  liability,  and,  with 
the  premiums  paid,  necessary  for  the  payment  of 
losses,  but  the  excess  of  the  premium  payments 
and  profits  constitute  the  surplus,  and  upon  this 
the  same  tax  should  be  imposed  as  on  all  other 
property.  If  there  is  no  surplus  there  should  be 
no  tax,  for  to  impose  it  then,  would  be  an  encroach- 
ment on  the  very  fund  which  the  State  insists 
must  be  held  to  maintain  solvency. 

A  tax  upon  present  surplus  accumulations,  with 
its  attendant  requirements,  would  no  doubt  result 
in  a  return  to  the  policyholders  of  the  needless  and 
unnecessary  surplus,  but  even  in  such  case,  it  would 
not  disappear  from  the  channels  of  taxation,  while 
the  taxation  of  annual  surplus  accumulation  is  a 
method  so  correct  and  just  that  not  even  the  offi- 
cers of  the  companies  could  object.  If  from  the 
joint  contributions  of  the  policyholders  not  only 
the  protection  of  insurance  can  be  provided,  but  a 
profit  realized,  there  is  no  good  reason  why  such 
excess  and  profit  shall  not  contribute  to  the  same 
burthen  of  taxation  all  other  property  is  called 
upon  to  bear. 

Even  if  the  State  should  not  receive  so  large  an 
income  as  from  a  tax  upon  gross  premiums,  a  tax 
upon  annual  surplus  accumulation  is  the  only  just 
and  uniform  tax  which  can  be  imposed  without  dis- 
crimination between  organizations  furnishing  life 

70 


insurance,  and  without  making  the  insured  un- 
equally contribute  toward  a  tax  for  the  privilege 
of  carrying  life  insurance  for  the  protection  of  de- 
pendents. Besides  being  the  only  correct  method 
of  taxation  for  life  insurance  companies,  it  offers 
also  to  the  policyholders  a  means  by  which  to  en- 
force that  mutuality  by  which  alone  the  best  results 
at  the  least  cost  may  be  obtained. 

In  no  other  manner  can  life  insurance  be  con- 
ducted than  on  the  mutual  plan,  except,  at  a  greater 
cost  than  those  who  are  insured  could  by  mutual 
reciprocal  relationship  themselves  provide  the  pro- 
tection. 


VL— LEGISLATION. 


Wisconsin  is^the  only  State  in  which  there  is  a 
law  regulating  the  distribution  of  surplus;  every 
effort  made  in  other  States  to  secure  such  an  en- 
actment, has  been  met  by  the  determined  opposition 
of  the  lobby  representing  the  officers  of  the  de- 
ferred dividend  companies,  and  yet  no  requirement 
which  can  be  imposed  will  do  so  much  real  good 
or  be  of  greater  benefit  to  the  policyholders. 

At  the  time  the  law  was  enacted  in  Wisconsin 
no  more  detailed  regulation  was  required,  and  the 
enforcement  of  its  provisions  will  secure,  in  that 
State,  the  equity  to  which  the  policyholder  is  right- 
fully entitled.  Such  enforcement  will  also  direct 
the  attention  of  policyholders  in  other  States  to  the 
remedy  which  will  place  a  check  on  forfeiture  and 
extravagance  and  make  economy  and  equity, 
rather  than  size  and  volume,  the  factors  to  deter- 
mine the  merit  of  a  company. 

There  are  too  many  millions  of  dollars  involved, 
represented  by  policies  now  carried  which  may  be 
saved  to  thousands  of  families,  for  the  State  to 
permit  a  continuance  of  present  methods,  when  a 
few  simple  regulations  will  make  every  dollar  of 
insurance  more  secure  and  give  to  the  insured  their 
protection  at  less  cost. 

It  is  not  only  the  right,  but  the  duty  of  the  State 
to  enforce  equity  between  the  members  of  these 
corporations,  and  legislation,  in  other  States,  will 
alone  bring  about  such  a  result. 

Such  a  law  should  contain  the  following  pro- 
visions : 

72 


That  every  life  insurance  corporation  conducted 
on  the  mutual  plan,  or  in  which  the  policyholders 
share  in  the  profits  or  surplus,  shall  make  an  annual 
distribution  of  its  surplus,  in  which  all  policyhold- 
ers shall  participate,  and  of  which  apportionment 
each  policyholder  shall  receive  notice  as  soon  as 
the  dividend  has  been  declared. 

That,  for  the  purpose  of  making  the  annual  dis- 
tribution, the  company  shall  classify  the  policies 
into  two  divisions,  or  groups,  viz.:  i.  Policies  of 
one  year  standing,  and  2,  policies  which  have  been 
in  force  more  than  one  year;  and  the  surplus  ac- 
cumulated shall  be  apportioned  according  to  such 
classification. 

That  all  dividends  declared  shall  be  payable  in 
cash  on  the  date  the  next  annual  premium  or  in- 
stallment falls  due,  except,  that  where  the  insured 
entered  into  an  agreement  with  the  company,  the 
dividend  may  be  applied  to  a  reduction  of  the  pre- 
mium, or  may  be  added  to  the  policy  as  reversion- 
ary additions. 

That  there  shall  be  no  legal  lapse  of  a  policy  of 
life  insurance  for  non-payment  of  any  premium 
or  installment  due,  until  after  all  dividends  declared, 
and  the  cash  value  of  all  reversionary  additions 
credited  to  the  policy,  shall  have  been  applied  in 
keeping  the  policy  in  force  for  its  face  value,  and 
that  when  all  dividends  and  reversionary  additions 
have  been  so  applied,  and  the  insured,  upon  due 
notice,  fails  to  resume  payment  of  premiums,  the 
reserve  held  on  such  policy,  shall  be  applied  to  con- 
tinue the  policy  in  force  as  extended  insurance, 
paid-up  insurance,  or  be  cancelled  for  such  sur- 
render value  as  the  policy  may  provide. 

73 


That  the  provisions  of  such  law  shall  apply  to  all 
policies  of  life  insurance,  except,  purely  stock  con- 
tracts issued  by  a  stock  company  for  a  reduced 
premium,  which  reduction  of  premium  is  guaran- 
teed by  the  capital  stock  of  the  company  and  not  by 
the  contributions  of  the  other  policyholders. 

That,  in  determining  the  amount  of  surplus  to 
be  distributed,  there  shall  be  reserved  an  amount 
sufficient  to  meet  the  liabilitv  of  the  company  for 
all  pending  death  claims,  together  with  an  amount 
not  less  than  the  aggregate  net  value  of  all  out- 
standing policies,  said  value  to  be  computed  by  the 
American  or  the  Actuaries'  Experience  Table  of 
Mortality,  with  interest  not  exceeding  four  per 
cent. ;  the  excess  of  the  company's  funds  shall  con- 
stitute the  surplus. 

That  no  such  company  shall  be  authorized  to 
pay  for  securing  new  business,  a  commission  in  ex- 
cess of  two  per  cent,  of  the  face  of  the  policy  writ- 
ten and  delivered. 

That,  in  lieu  of  all  other  taxes,  except  taxes  on 
real  estate,  each  company  shall,  on  the  amount  of 
the  annual  surplus  accumulation  on  the  policies 
in  the  State,  before  the  same  has  been  declared  as 
dividends,  and  on  the  amount  of  surplus  held  and 
accumulated  on  contracts  entered  into  prior  to  the 
enactment  of  the  law  and  in  force  in  the  State,  pay 
as  an  annual  license  fee,  the  same  percentage  tax 
as  all  other  property  is  subjected  to  under  the  laws 
of  the  State. 

No  harm  can  come  to  a  single  company  from 
the  enactment  of  such  a  law;  on  the  contrary,  if 
the  law  required  of  every  mutual  company  an  an- 
nual accounting  and  distribution  of  excess  pay- 

74 


ments  and  profits,  and  restricted  the  amount  which 
such  companies  could  pay  for  new  business,  so  that 
new  policies  would  pay  their  own  cost,  every  pol- 
icyholder  would  in  the  future  receive  a  greater  and 
more  equitable  return,  for  then  there  could  be  such 
competition  only  as  would  give  to  each  the  most  of 
saving  and  profit  by  conducting  the  business  on  the 
most  economical  basis. 

Such  are  the  requirements  imposed  on  American 
companies  by  the  government  of  Prussia  for  the 
protection  of  its  citizens,  and  requirements  to  which 
the  New  York  Life  and  the  Germania  Life  submit 
in  Prussia,  can  hardly  become  a  burden  when  im- 
posed in  the  United  States. 

The  restriction  as  to  the  cost  for  obtaining  new 
business  is  one  of  these  requirements,  and  a  limita- 
tion, not  to  exceed  two  per  cent,  of  the  face  of  the 
policy,  would  permit  an  average  maximum  com- 
mission of  fifty  per  cent,  of  the  first  year's  pre- 
mium, and  by  classifying  policies  into  two  groups, 
before  making  the  annual  distribution  of  surplus, 
the  one-year  policies  bear  their  own  cost,  but  this 
is  again  equalized  by  the  low  death  rate  among 
such  policyholders. 

The  life  companies  reporting  to  the  New  York 
Insurance  Department  during  the  year  1901  paid 
on  account  of  policy  contracts  $183,393,528,  while 
the  cost  of  management  was  $103,787,516,  or  near- 
ly three-fifths  of  their  payments  on  account  of  pol- 
icy contracts  and  nearly  two-fifths  of  their  total 
premium  receipts.  Commissions  alone  account  for 
$49,970,852,  or  nearly  one-half  of  the  entire  cost  of 
management.  During  the  ten-year  period,  1892- 
1901,  inclusive,  the  companies  reporting  to  the 

75 


New  York  Insurance  Department  wrote  a  total  of 
$10,731,568,590  of  insurance,  and  during  that  pe- 
riod $7,149,767,534  terminated,*  leaving  a  net  gain 
°f  $3,581,801,056,  or  a  little  over  32  per  cent,  of 
the  amount  written. 

The  eagerness  to  outclass  competitors  in  the  vol- 
ume of  business  written,  or  a  desire  to  stay  in  the 
race,  has  caused  most  companies  to  pay  excessive 
commissions  and  bonuses,  and  has  led  them  to  ac- 
quire a  volume  of  business  which  there  never  was 
a  reasonable  prospect  of  keeping.  The  deferred 
accounting  to  the  policyholder,  and  the  forfeiture 
impositions,  made  possible  the  extravagance  which 
has  characterized  these  wasteful  methods  for  which 
alone  large  surplus  accumulations  are  necessary. 
As  a  result  about  70  per  cent,  of  the  total  insurance 
terminated  has,  on  the  average,  annually  gone  off 
the  books  by  the  lapse  and  surrender  route,  while 
salaries  to  officers  have  not  decreased  in  the  same 
ratio  as  have  dividends  to  policyholders. 

The  Gain  and  Loss  Exhibit  placed  in  the  Insur- 
ance Department  blank  in  1895,  and  which  shows, 
when  properly  prepared,  the  true  condition,  merit 
and  weakness  of  a  company,  through  extraordinary 
efforts  of  the  officers  of  deferred  dividend  com- 
panies, failed  to  appear  in  any  of  the  department 
reports  except  Wisconsin,  Connecticut  and  Illinois, 
and  the  opposition  has  been  so  continuous,  that  this 
exhibit  has  been  entirely  eliminated  from  the 

*By  death,  $695,015,836;  by  maturity,  $131,101,074;  by 
expiry,  $377,413,427.  Total,  $1,203,530,337. 

Lapse,  $2,943,744,162;  surrender,  $1,142,588,868;  not 
taken,  $1,465,281,286.  Total,  $5,551,614,316. 

76 


blank,  and  will  in  all  probability  disappear  from  all 
reports  except  Minnesota. 

And  yet  the  purpose  of  the  Exhibit  is  only  to 
show  what  the  margins  or  loading  on  net  pre- 
miums amount  to,  in  order  that  a  comparison  of 
the  company's  expenses  of  management  may  be 
made  therewith ;  what  the  tabular  or  expected  mor- 
tality was,  in  order  to  compare  therewith  the 
actual  death  losses  incurred;  what  amount  of  in- 
terest has  been  earned  in  excess  of  the  amount 
required  to  maintain  the  legal  reserve;  what  was 
the  amount  of  the  reserve  held  by  the  company 
on  policies  terminating  otherwise  than  by  death, 
maturity  or  expiry,  and  the  amount  paid  upon  sur- 
render of  such  policies;  what  gains  or  losses  are 
incurred  in  the  sale  of  any  assets ;  what  dividends 
have  been  declared ;  in  short,  to  disclose  the  results 
of  the  company's  methods  upon  the  interests  of  the 
policyholders — information  which  in  every  well- 
regulated  company  is,  or  should  be,  annually  pre- 
pared as  a  test  of  assumptions  and  for  the  guidance 
of  the  officers.  That  there  should  be  such  opposi- 
tion to  publicity  on  the  part  of  the  officers  of  com- 
panies— which  the  policyholders  are  said  to  own — 
can  be  explained  by  the  fact  that  such  exhibit  ex- 
poses extravagance,  illiberality  and  poor  manage- 
ment; but  just  why  insurance  commissioners 
should  permit  the  useful  information  given  by  this 
exhibit  to  disappear  from  the  statements  of  com- 
panies, is  difficult  to  understand. 

The  information  obtained  showed  that  the  com- 
panies were  exceeding  by  more  than  two  million 
dollars  the  entire  policy  loadings  for  expenses ;  one 
company,  which  immediately  prior  to  the  adoption 

77 


of  the  gain  and  loss  exhibit  made  a  net  gain  of 
one  million  five  hundred  thousand  dollars  on  lapsed 
and  surrendered  policies  in  one  year — not  bad  for  a 
purely  mutual  company — and  which  strenuously 
objected  to  the  use  of  the  exhibit,  immediately 
liberalized  its  policies.  It  is  to  be  regretted  that 
tne  use  of  this  exhibit  was  not  made  a  statutory 
requirement,  but  as  soon  as  legislation  is  suggested, 
we  are  told  that  there  is  too  much  legislation  al- 
ready, that  companies  should  be  permitted  to  work 
out  such  reforms;  and  they  generally  work  out  of 
them,  just  as  they  did  on  the  gain  and  loss  ex- 
hibit. 

Legislation  is,  has  been,  and  always  will  be  the 
hope  and  safeguard  of  the  policyholders,  and  must 
be,  in  the  very  nature  of  the  organization,  acting 
as  the  medium  for  the  transaction  of  the  business. 
To  transact  the  business  of  life  insurance  requires 
a  large  number  of  individuals  to  contribute  to  a 
common  fund;  but  so  large  a  number  cannot,  in 
the  interest  of  the  company,  be  localized,  and  the 
membership  must  necessarily  be  spread  over  large 
territory,  so  that  personal  supervision  and  inspec- 
tion, or  participation  in  the  selection  of  officers  and 
management,  becomes  impossible.  The  member- 
ship, though  united  by  a  common  bond  of  interest, 
are  separated  by  distance  and  unknown  to  each 
other,  and  rely  largely  upon  the  supervision  of  the 
State,  and  legislation,  for  the  protection  of  their 
interests. 

The  law  fixes  the  character  of  the  investments 
and  regulates  the  solvency  of  the  company.  The 
law  has  given  to  the  policyholder  every  right  and 
privilege  which  he  to-day  enjoys  in  life  insurance, 

78 


and  with  the  great  interests  involved,  reaching  out 
into  every  community  and  every  family,  so  vitally 
affecting  the  widow  and  the  fatherless  in  whose 
well-being  lies  the  interest  of  the  State,  demand  not 
only  the  sheltering  arm  of  the  law,  but  all  the 
power  it  can  exercise  to  enforce  equity  and  dis- 
courage forfeitures. 

No  one  life  insurance  company  enjoys  a  special 
privilege;  neither  is  there  a  combination  among 
companies  to  fix  the  price  or  control  the  cost  of  life 
insurance;  but  no  Trust  in  the  world  has  the  ac- 
cumulated wealth  of  five  o-reat  life  insurance  com- 
panies, nor  the  power  through  their  method  and 
conduct  of  the  business,  to  throttle  and  wreck  their 
young  and  small  competitors. 

There  are  all  of  thirtv-five  small  companies  in 
this  country,  fighting  an  uphill  fieht  for  a  foothold 
and  success ;  they  are  making  use  of  every  effort, 
and,  too  often,  of  every  makeshift  which  human 
ingenuity  can  devise,  to  stand  a  chance  in  the  com- 
petition for  business,  and  if  present  methods  and 
conditions  continue,  the  large  majority  are  doomed 
to  failure,  not  by  reason  of  a  lack  of  honesty,  en- 
ergy and  perseverance,  but  by  an  inability  to  com- 
pete with  the  extravagant  methods  employed  to 
secure  new  business. 

The  only  purpose  of  a  large  surplus  is  to  hide 
large  and  extravagant  expenditures.  Large  sur- 
plus accumulation  is  unnecessary,  and  has  not  been 
the  means  of  good  to  life  insurance.  Deferring 
distribution  for  long  periods,  instead  of  returning 
the  overpayment  and  profit  as  soon  as  the  cost  can 
be  determined,  has  deprived  thousands  of  what  was 
justly  due  them. 

79 


Legislation,  demanding  that  perfect  equity  pre- 
vail in  the  conduct  of  the  business  of  life  insur- 
ance, cannot  impose  hardship  upon  a  single  com- 
pany, while  for  the  policyholders  and  beneficiaries 
it  will  be  of  great  value  and  benefit. 

Ordinary  common  honesty  can  hardly  be  herald- 
ed as  a  new  discovery. 


80 


SIMILAR  LAWS. 

Illinois  and  Oklahoma  have  laws  exactly  identi- 
cal with  Section  1952  of  Wisconsin,  and  on  these 
laws  the  same  interpretation  will  apply : 

ILLINOIS. 

"DIVIDENDS  BY  MUTUAL  COMPANIES. — Life  insurance  companies 
doing  business  in  this  State,  which  do  business  upon  the  principal 
of  mutual  insurance,  or  the  members  of  which  are  entitled  to  share 
in  the  surplus  funds  thereof,  may  make  distribution  of  such  surplus 
as  they  have  accumulated  annually,  or  once  in  two,  three,  four  or 
five  years,  as  the  directors  thereof  may,  from  time  to  time,  deter- 
mine. In  determining  the  amount  of  the  surplus  to  be  distributed 
there  shall  be  reserved  an  amount  not  less  than  the  aggregate  net 
value  of  all  outstanding  policies;  said  value  being  computed  by 
the  'combined  experience'  or  'actuary*  rate  of  mortality,  with  in- 
terest not  exceeding  four  per  cent." — Act  1869. 

OKLAHOMA. 

"Life  insurance  companies,  doing  business  in  this  Territory, 
which  do  business  upon  the  principle  of  mutual  insurance,  or  the 
members  of  which  are  entitled  to  share  in  the  surplus  funds  there- 
of, may  make  distributions  of  such  surplus  as  may  have  accu- 
mulated, annually,  or  once  in  two,  three,  four,  or  five  years,  as 
the  directors  thereof  may  from  time  to  time  determine.  In  deter- 
mining the  amount  of  the  surplus  to  be  distributed,  there  shall  be 
reserved  an  amount  not  less  than  the  aggregate  net  value  of  all 
outstanding  policies,  said  value  being  computed  by  the  combined 
experience  or  actuary  rate  of  mortality,  with  interest  not  exceeding 
four  per  cent." — Ins.  Laws  1893. 

Missoiiri  and  North  Dakota  have  similar  laws 
applicable  to  Domestic  mutual  life  insurance  com- 
panies : 

MISSOURI. 

"SECTION  7881.  DISTRIBUTION. — All  life  insurance  companies 
organized  under  the  laws  of  this  State  may  make  distribution 
among  such  policyholders  thereof,  who  may  be  entitled  to  share  in 
the  profits  of  such  companies,  of  such  surplus  as  such  companies 
may  accumulate,  or  any  part  thereof'  which  distribution  shall  be 
made  out  of  actual  surplus  profits  only,  and  may  be  declared  an- 
nually, or  once  in  two,  three,  four  or  five  years,  as  the  board  of 
directors  or  other  officers  charged  with  the  management  of  the 
company's  affairs  may  from  time  to  time  determine.  Each  com- 
pany, in  determining  the  amount  of  surplus  profits,  shall  reserve 
out  of  its  assets,  including  capital  stock,  if  any:  First,  an  amount 
sufficient  to  provide  for  all  losses,  expenses  and  liabilities  of  such 
company;  second,  an  amount  not  less  than  the  aggregate  net  value 
of  all  its  outstanding  policies,  said  value  to  be  computed  as  directed 
for  the  valuation  of  policies  by  section  7882.  Such  companies,  in 

81 


making  any  such  distribution  of  profits  among  their  policyholders, 
may  apportion  the  amount  so  set  apart  for  distribution  in  propor- 
tion to  the  sums  of  money  which  each  policyholder  has  contributed 
to  the  assets  of  the  company,  making  a  just  and  equitable  allow- 
ance for  interest  thereon.  Policies  waich  have  become  payable  be- 
fore the  time  when  such  distribution  is  made,  and  after  the  date 
of  the  last  previous  distribution  of  surplus,  may  share  in  the  same 
equitably  and  proportionally." — R.  S.  1889,  sec.  5840. 

NORTH  DAKOTA. 

"SECTION  3111.  DISTRIBUTION  OF  SURPLUS  ON  LIFE  POLICIES. — 
Every  domestic  mutual  life  insurance  company  shall  annually,  or 
once  in  every  two,  three,  four  or  five  years,  as  it  shall  determine, 
and  as  may  be  conditioned  in  its  policies,  make  distribution  of  all 
surplus  it  may  have  accumulated  since  its  last  dividend  of  surplus. 
B'y  such  surplus  is  here  intended  all  accumulations  since  its  last 
distribution  of  surplus  above  its  debts  and  reserve  computed  as 
provided  in  section  3095.  The  distribution  shall  be  unon  what  is 
known  as  the  contribution  plan,  and  each  member  upon  whose 
policy  no  premium  is  overdue  and  unnaid  shall  be  entitled  to  the 
amount  contributed  by  his  policy  to  such  surplus.  Policies  which 
have  become  payable  before  the  time  when  such  distribution  is 
made,  and  after  the  date  of  the  last  previous  distribution,  shall 
share  in  the  same  equitably  and  proportionally." — S.  1898. 

Massachusetts  also  has  a  similar  law  governing 
the  distribution  of  surplus  of  Domestic  mutual  life 
insurance  companies,  with  the  addition  of  permit- 
ting1 the  companies  to  retain  a  percentage  of  the 
surplus  as  a  safety  fund,  but  in  the  event  of  death, 
or  the  maturity  of  the  policy,  provides  for  a  return 
of  the  policy's  equity  in  this  safety  fund,  as  a  spe- 
cial dividend,  payable  with  the  face  of  the  policy. 
The  law  is  as  follows : 

"SECTION  75.  Every  such  domestic  life  company  shall  an- 
nually, or  once  in  every  two,  three,  four  or  five  years,  as  it  shall 
determine,  and  as  may  be  conditioned  in  its  policies,  make  dis- 
tribution of  all  surplus  it  may  have  accumulated  since  its  last 
dividend  or  surplus.  By  such  surplus  is  here  intended  all  accu- 
mulations since  its  last  distribution  or  surplus  above  its  debts  and 
reserve  computed  as  provided  in  section  eleven.  The  distribution 
shall  be  upon  what  is  known  as  the  contribution  plan,  and  each 
member  upon  whose  policy  no  premium  is  overdue  and  unpaid 
shall  be  entitled  to  the  amount  contributed  by  his  policy  to  such 
surplus.  Policies  which  have  become  payable  before  the  time 
when  such  distribution  is  made,  and  after  the  date  of  the  last 
previous  distribution,  shall  share  in  the  same  equitably  and  pro- 
portionally: provided,  that,  besides  the  aggregate  market  value 
margin  in  excess  of  par  of  all  bonds  held  by  a  company,  and  not 
included  in  its  reserve,  any  such  company  may  accumulate  from 

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its  surplus  and  hold  as  a  safety  fund  an  amount  not  larger  than 
ten  per  cent,  of  its  required  legal  reserve.  Such  safety  fund,  or 
any  part  thereof,  may  be  applied  to  supply  any  deficiency  in  the 
reserve  caused  by  depreciation  of  assets  or  losses  and  expenses  be- 
yond the  ability  of  the  company  to  otherwise  provide  for.  Upon 
termination,  by  reason  of  death  or  maturity,  of  any  policy  here- 
after issued  upon  which  there  has  been  no  default  in  payment  of 
premium,  the  amount  payable  thereon  shall  include,  as  a  special 
distribution  of  surplus,  such  portion  of  the  company's  safety  fund, 
if  any,  as  may  be  determined  by  the  following  rule,  viz.:  If  the 
company's  surplus,  as  shown  by  the  last  report  of  the  insurance 
company,  as  made  to  the  insurance  commissioner,  prior  to  the 
termination  of  the  said  policy,  was  a  greater  amount  than  was 
shown  by  the  first  report  of  the  insurance  company  after  the  policy 
was  issued,  it  shall  be  ascertained  what  percentage  the  net  increase 
in  surplus  during  that  time  is  on  the  company's  total  distributions 
during  the  same  interval,  and  the  same  percentage  of  the  sum  of 
all  the  distributions  already  paid  on  said  policy  shall  constitute  the 
special  dividend." 

It  could  hardly  have  been  the  intention  of  the 
Legislature,  by  the  insertion  of  the  word  "Do- 
mestic," appearing  in  the  law  of  Missouri,  North 
Dakota  and  Massachusetts,  to  place  restrictions 
upon  companies  organized  in  these  States  and  thus 
grant  greater  privileges  to  corporations  of  other 
States,  but  whether  this  was  the  intention  or  not, 
the  chief  fact  which  this  law  of  Illinois,  Massa- 
chusetts, Missouri,  North  Dakota  and  Oklahoma 
emphasizes,  as  does  Section  1952  of  Wisconsin,  is, 
that  the  distribution  of  surplus  be  made  annually, 
unless  the  board  of  directors  have  made  use  of 
the  option  to  extend  the  distribution  to  two,  three, 
four  or  five  year  periods,  and  by  such  restriction 
minimizing  the  evils  of  forfeitures.  Massachusetts 
companies  have  never  attempted  to  issue  policies 
on  which  the  apportionment  of  surplus  was  to  be 
deferred  beyond  a  period  of  five  years,  owing  to 
the  requirements  of  this  law.  These  companies, 
and  annual  dividend  companies  of  other  States, 
have  not  been  able,  on  account  of  the  enforced 
short  period  accounting  to  policyholders,  to  enter 

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the  mad  competition  for  large  volumes  of  business 
at  extravagant  commissions  and  bonuses,  but 
rather  compelled  to  make  it  "a  cardinal  principle 
that  all  the  brains,  all  the  experience,  all  the  skill, 
all  the  industry  obtainable  be  applied"  to  a  con- 
servative conduct  of  the  business  and  by  an  eco- 
nomical management  returning  to  the  policyholder 
his  overpayments  as  soon  as  the  cost  of  the  insur- 
ance could  be  ascertained.  Only  then  does  each 
policyholder  receive  his  equitable  share  of  the  sur- 
plus and  his  insurance  at  cost,  when  the  distribu- 
tion is  made  at  such  short  periods  as  will  incur 
forfeiture  to  the  least  number,  and  the  sole  purpose 
of  these  enactments  must  have  been  to  enforce  such 
short  period  accounting  as  a  "cardinal  principle"  of 
mutual  life  insurance. 


A  T  ~"~ 


